Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry

Africa Region Working Paper Series No. 49 June 2003

Abstract

egislation and regulations governing rural and micro finance institutions (RMFIs) in Ghana have evolved with the market, both opening up possibilities for new types of institutions and tightening up to restrain excessive entry and weak performance in the face of inadequate supervision capacity. The result though not entirely by conscious design is several tiers of different types of RMFIs with a strong savings orientation and a much greater role of licensed institutions relative to NGOs than is found in many countries. Small unit Rural and Community Banks (RCBs) are accommodated in the Banking Act; savings and loan companies in the Non-Bank Financial Institutions (NBFIs) Law; and credit unions under a new law being prepared to recognize their dual nature as cooperatives and financial institutions. The informal sector is dominated by a variety of savings-based methodologies, both individual and group. Supervision of a large number of RMFIs is costly relative to their potential impact on the financial system (about 7% of assets), and the Bank of Ghana has adopted a number of strategies to cope with its limited supervision capacity: raising reserve requirement for RCBs to as high as 62%; drastically raising the minimum capital requirement for NBFIs; and permitting self-regulation of credit unions by their apex body. It is currently establishing an Apex Bank to serve the RCBs, link them more effectively to the commercial banking system, and take the lead in building their capacity and, eventually, in undertaking front-line supervision. Although the US$2 million minimum capital requirement makes the S&Ls less accessible for NGO transformation, it has led to introduction of foreign capital. While the RCBs have had limited outreach, some have effectively partnered with NGOs to introduce microfinance methodologies such as village banking, and they are now being strengthened as the backbone for expansion of rural financial services. Linkages also occur between informal savings-based susu institutions and both RCBs and S&Ls. The Bank of Ghana has taken a relatively laissez-faire position vis--vis the informal sector.

Liberalization of financial policies in the late 1980s has enabled RMFIs to develop with relatively little interference, and without a clearly articulated national strategy. Nevertheless, continued high inflation and interest rates (particularly on Treasury Bills) has limited the incentive for commercial financial institutions to reach out to smaller, poorer clients (though enabling weak RCBs to improve their capital adequacy with highly restricted lending). Furthermore, directed, subsidized loans under current government poverty programs threaten to undermine loan performance and weaken the long-run potential for developing sound, self-sustaining RMFIs on a significant scale. While Ghanas approach has yielded a wide range of RMFIs and products with the potential for substantial outreach to the poor and sustainability based on savings mobilization, it has also permitted easy entry of institutions with weak management and internal controls. Ghanas experience demonstrates the difficulty of striking the right balance between encouraging entry and innovation on the one hand and establishing adequate supervision capacity on the other. In several segments RCBs, credit unions, S&Ls Ghana has gone through a cycle of easy entry, weak performance, tightening up regulations, and some restructuring (through closing insolvent units, takeovers, or infusion of new investment). The Bank of Ghana has exercised considerable regulatory forbearance in allowing weak units time to comply with stricter regulations (or, in the case of the credit unions, to establish a self-regulating system while awaiting passage of a new law). On the whole, this approach appears to have succeeded in giving Ghana a very diverse, reasonably robust system of RMFIs, with relatively little cost in terms of outright failed institutions (and lost deposits) and moderate drain on supervisory resources. Nevertheless, the system has failed to achieve impressive outreach, especially to the rural poor, and remains burdened by a number of weak units that the regulatory authorities are not well equipped to turn around.

AuthorsAffiliation and Sponsorship

William F. Steel Senior Adviser, Private Sector Unit, Africa Region, World Bank Email: wsteel@worldbank.org David O. Andah Managing Consultant, Consultant Management Enterprise (Ghana) Email: cmeltd@ghana.com
The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with potential for improving economic performance and social conditions in Sub-Saharan Africa. The Series publishes papers at preliminary stages to stimulate timely discussion within the Region and among client countries, donors, and the policy research community. The editorial board for the Series consists of representatives from professional families appointed by the Regions Sector Directors. For additional information, please contact Paula White, managing editor of the series, (81131), Email: pwhite2@worldbank.org or visit the Web site: http://www.worldbank.org/afr/wps/index.htm . The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they do not necess arily represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to them.

Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry

By William F. Steel & David O. Andah

June 2003

Foreword
his country study is one of three being published as part of research on the implications of legal and regulatory structures for the development of microfinance institutions in African countries. This research is a collaborative effort between the World Banks Financial Sector Operations and Policy Department and the Financial and Private Sector Units of the Africa Region, with funding from the Financial Sector Board and Africa Regional Programs. The published country studies on Benin, Ghana, and Tanzania, together with work on Ethiopia, South Africa, Uganda, and Zambia in Africa, as well as experiences drawn from other regions, will form the basis for a comparative review in tended to provide practical lessons and guidance to policymakers and donor agencies on how the structure of legal and regulatory systems may affect (and in turn be influenced by) the evolution of microfinance institutions in different country contexts.

relatively poor households and microenterprises in small transactions suited to their conditions. Innovative microfinance institutions have had substantial success in making financial services accessible to the poor in many parts of the world, and microfinance is increasingly provided through licensed, commercial financial institutions capable of mobilizing the funds necessary to significantly increase the scale of outreach. The microfinance sector has evolved and developed according to different patterns and growth paths in various countries and regions. The literature on microfinance identifies the legal and regulatory framework as one factor that influences the emergence of different kinds of institutional providers of microfinance and, especially, their development into selfsustaining, commercial microfinance institutions capable of reaching growing numbers of poor clients, especially in rural areas. These country studies provide an assessment of how the legal and regulatory framework influences the microfinance sector and the benefits and risks of different approaches, providing important lessons for other countries that may be going through a similar process of establishing or modifying the legal and regulatory framework for microfinance.

Increasing the access of the poor to sustainable financial services is an important part of the World Bank Africa Regions strategy for supporting the Millenium Development Goals for poverty reduction. Convenient and affordable instruments for savings, credit, insurance, and payment transfers are essential both to cope with the economic fluctuations and risks that make the poor especially vulnerable and to take advantage of opportunities to acquire productive assets and skills that can generate increased income. Microfinance is the application of innovative methodologies that make such financial services available to

Gerard Byam

Sector Manager
Financial Sector, Africa Region

ii

The authors are grateful for comments on earlier drafts from Peer Reviewers Joselito Gallardo
and Rich Rosenberg, as well as from Kwaku Addeah, Stefan Staschen, Andreas Thiele, Antony Thompson, and workshop participants. The authors also appreciate information and inputs provided by Ken Appenteng Mensah, Ed mund Armah, Eyob Tesfaye, Amha Wolday, the Association of Rural Banks, Bank of Ghana, Ghana Co-operative Credit Union Association, and the Ghana Microfinance Institutions Network.

iii

Abbreviations and Acronyms

ADB AfDB ARB ARBAB BOG CAMEL CBO CUA CUs DANIDA DFID ENOWID FFH GHAMFIN GCSCA GTZ IDA IFAD MFIs MOF MSEs NBFIs NBSSI NGOs NRCD PNDCL RBs RCBs RFSP RMF RMFI S&L SAT SMEs T-bills UK UNDP USAID WWBG Agricultural Development Bank African Development Bank Association of Rural Banks ARB Apex Bank Bank of Ghana Capital adequacy, Assets quality, Management, Earnings and Liquidity Community-based organization Ghana Co-operative Credit Unions Association Credit Unions Danish International Development Agency Department for International Development (UK) Enhancing Opportunities for Women in Development Freedom From Hunger Ghana Microfinance Institutions Network Ghana Co-operative Susu Collectors Association German Agency for Technical Cooperation International Development Association International Fund for Agricultural Development microfinance institutions Ministry of Finance micro and small enterprises non-bank financial institutions National Board for Small-Scale Industries non-governmental organizations National Revolutionary Council Decree Provisional National Defense Council Law Rural Banks Rural and Community Banks Rural Financial Services Project (AfDB, GTZ, IFAD, World Bank) rural micro finance rural and micro finance institutions Savings and Loans Company Sinapi Aba Trust Small and Medium-scale Enterprises Treasury Bills United Kingdom United Nations Development Program United States Agency for International Development Womens World Banking Ghana

iv

Table of Contents Foreword ......................................................................................................................................... ii Abbreviations and Acronyms ..........................................................................................................iv I. Background ............................................................................................................................. 1 A. Introduction....................................................................................................................... 1 B. Macroeconomic and Policy Context ................................................................................. 2 II. Structure and Performance of Rural and Micro Finance Industry.......................................... 3 A. Agricultural Development Bank ....................................................................................... 5 B. Rural and Community Banks ............................................................................................ 5 C. Non-Bank Financial Institutions ....................................................................................... 9 D. Credit Unions .................................................................................................................. 11 E. Non-Governmental and Community- Based Organizations ............................................. 13 F. Donor Programs ............................................................................................................... 15 G. Informal Finance ............................................................................................................. 15 H. Government Credit Programs ......................................................................................... 18 III. Licensing and Regulatory Framework for Rural and Micro Finance ................................. 19 A. Structure and Origins of the Licensing Framework ........................................................ 19 B. Evolution of Regulatory Norms ...................................................................................... 20 C. Supervision and Monitoring Mechanisms....................................................................... 26 D. Performance of the Supervision System ......................................................................... 29 IV. Business and Contract Enforcement Environment .............................................................. 31 A. Registration of RMFIs .................................................................................................... 31 B. Regulation of Small Business Activity ........................................................................... 31 C. Financial Contracts.......................................................................................................... 32 V. Assessment of Impact of Regulation on the Evolution of Microfinance ............................. 33 A. Advantages and Drawbacks of Ghanas Approach......................................................... 34 B. Conclusions ..................................................................................................................... 38 C. Recommendations for Ghana .......................................................................................... 38 Annex 1: Microfinance Legislation in Uganda and Ethiopia ....................................................... 40 Annex 2: Evolution of Legal Framework for RMFIs ................................................................... 43 Annex 3: Summary of Laws and Regulations for RMFIs and Businesses ................................... 46 Schedule 1. Legal and Regulatory Requirements for Different Types of MFIs - Ghana................. 46 Schedule 2. Classification of Regulations According to Objective Ghana ................................ 47 Schedule 3. Legal Systems and Judicial Processes .................................................................... 47 Annex 4: Reports to Be Submitted by S&Ls, RCBs, and Banks.................................................. 48 References ..................................................................................................................................... 49 BOXES Box 1: Performance Monitoring Data and GHAMFIN .................................................................. 5 Box 2: Types of Group and Individual Savings and Credit Programs ........................................... 8 Box 3: Inventory Credit Scheme ................................................................................................... 14 Box 4: Types of Susu (Savings Collection) in Ghana ................................................................... 16

TABLES Table 2.1: Classification of Rural Banks ........................................................................................ 6 Table 2.2: Average Size of Ghanas Rural Banks and Credit Unions Relative to African MFIs... 7 Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993 ............................. 9 Table 2.4: Growth in Credit Unions and Membership, 1968-2001 .............................................. 12 Table 2.5: Performance of Sinapi Aba Trust ................................................................................ 13 Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$ .............................. 21 Table 3.2: New Reserve Requirements for Rural and Community Banks ................................... 23 Table 3.3: S&L Provisioning Rates .............................................................................................. 25 Table 3.4: RCBs Provisioning Rates ........................................................................................... 25 Table 3.5: Credit Exposure Limit as Percentage of Net Worth.................................................... 26 Table 3.6: Selected Balance Sheet Items (2001) ( million) ...................................................... 29 Table 5.1: Assets of Depository Financial Institutions, 2001 ( million)..................................... 36

Review of Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry
William F. Steel and David O. Andah

I.
A. Introduction

Background

The purpose of this paper is to assess how the policy, le gal and regulatory framework has affected and been influenced by the development of rural and micro finance institutions 1 (RMFIs) in Ghana, especially in terms of the range of institutions and products available, their financial performance and outreach (particularly to the rural and lower- income population). This review of Ghanas experience is intended to help guide other countries that are in the process of adopting legislation and regulations for RMFIs. The study also examines how the operation of RMFIs and their clients may be affected by the impact of business and commercial laws and institutions on contract enforcement and the operation of businesses. The potential of microfinance to reach large numbers of the poor is now well understood (Robinson 2001). Diversity of RMFIs and products is facilitated by a flexible regulatory environment in which they can develop innovative methodologies for reaching different market niches not served by commercial banks. Nevertheless, at some point in the sectors evolution, in the growth of a successful RMFI, in the willingness of investors to enter these niches regulations are appropriate both to facilitate commercialization and sustainability of the rural and micro finance (RMF) industry (especially through mobilization of savings from the public) and to ensure the stability of the financial system (as well as to protect deposits). Difficult decisions must be made in each country context as to the timing and complexity of regulations in order to promote orderly development without unduly stifling innovation. This review of Ghanas experience, together with comparisons to other country case studies, is intended to draw lessons on how the timing and design of regulations has developed and affected the diversity, outreach and sustainability of RMFIs. Ghana is particularly interesting because it has evolved a tiered system of different laws and regulations for different types of institutions, largely in response to local conditions, needs and institutio nal developments. The resulting system resembles the tiered approach
1

Microfinance refers to small financial transactions with low-income households and microenterprises (both urban and rural), using non-standard methodologies such as character-based lending, group guarantees, and shortterm repeat loans. Rural finance includes other instruments and institutions specifically intended to finance rural activities, both farm and off-farm. The common elements are that the clients being served typically lack the characteristics (e.g., titled property as collateral) required by commercial banks or are located beyond the reach of commercial bank branches and that innovative methods and specialized products or institutions are needed to reach these markets.

recommended by the World Banks 1999 study of microfinance regulation from the viewpoint of a regulator trying to assess what characteristics (such as size and taking deposits from the public) of RMFIs should trigger a regulatory response in the sense that the likely benefits would outweigh the costs of supervising relatively small financial intermediaries (Van Greuning et al. 1999). This approach is being adopted in Uganda, which already has one specialized microfinance institution under the existing non-bank financial institution category and a licensed commercial bank offering mainly rural and micro finance services. Ugandas new (2002) Micro Deposit-taking Institutions Law provides for central bank licensing of specialized microfinance institutions that wish to mobilize savings and use them for lending, while leaving credit-only NGO MFIs and small member-based organizations to operate outside direct regulation (Annex 1a). This approach stands in contrast to the approaches of countries such as Ethiopia, which allows only one category of licensed RMFI (Annex 1b). 2 While Ghanas approach has fostered a wide range of RMFIs, formal and informal (rural banks, savings and loan companies, credit unions, non-governmental organizations [NGOs], savings and credit associations of various types, and informal savings collectors and moneylenders), it has not been so successful in terms of achieving strong financial performance, significant scale, and true commercialization of microfinance. Although it is premature to judge what approach is most likely to be successful by these standards, it is an appropriate time to assess the extent to which Ghanas flexible, evolutionary, tiered approach is leading the development of RMFIs in the right direction. After briefly reviewing Ghanas macroeconomic and policy context in the remainder of this chapter, Chapter II sets out the structure, products and performance of RMFIs in Ghana, as a context for examining the evolution of the legal, regulatory and supervisory framework for RMFIs in Chapter III. Chapter IV briefly reviews relevant aspect of the business and contract enforcement environment, while Chapter V concludes with an assessment of how the legal and regulatory environment has affected the development of rural and micro finance in Ghana. B. Macroeconomic and Policy Context3 Ghana has a population of about 18 million, which has been growing at about 3% per year. Recent statistics (1999-2000) indicate that 63% of the population live in rural areas and 37% in urban areas. Gross domestic product (GDP) for 2001 at current prices stands at US$5.36 billion, with an annual growth rate of 4.2%; per capita GNP of US$390 remains lower than the average per capita income level of US$520 for Sub-Saharan Africa. Inflation and high interest rates have been a persistent problem; the end-of-period inflation rate rose from 13.8% in 1999 to 40.5% in 2000 before falling to 21.3% in 2001, with 91-day Treasury Bill (T-bill) rates reaching 42% in 2001 before declining to 22% in 2002. Ghanas financial structure is fairly shallow: the degree of monetization of the economy stands at 20.7%, as measured by the M2/GDP ratio. With international reserves at only 1.5 months of imports as of 2001, Ghanas economy is markedly vulnerable to external shocks. Ghana has focused on poverty reduction as the core of its development strategy. This approach was galvanized in 1995 with launching of the first version of Ghana Vision 2020
2

Savings and credit cooperatives are also permitted, but under the Department of Cooperatives rather than the central bank. 3 This section draws extensively from Gallardo (2002), with updating of the figures.

initiation of institutional arrangements to promote and analyze poverty reduction. The Government prepared a Development Strategy for Poverty Reduction in 2000 and has since prepared the Ghana Poverty Reduction Strategy 2002-2004: An Agenda for Growth and Prosperity. Poverty in Ghana has decreased from 51% of the population in 1991-92 to about 43% of the population living below the poverty line in 1998, although the average consumption level of the poor in Ghana is about 30% below this level. 4 The reductions in poverty levels have tended to be concentrated in the Accra and the rural forest areas. Poverty remains substantially higher in rural areas (52%) than in urban areas (23%), and more than one- half of the population living in the rural savannah zones continue to be extremely poor. Poverty is highest among the self-employed households cultivating agricultural crops, and has decreased only slightly compared to the self-employed households engaged in export-crop agriculture and the wage employees in the public and private sectors. The overall policy framework for microfinance is informed by the poverty reduction strategy, which seeks to balance growth and macroeconomic stability with human development and empowerment in such a way as to positively reduce the countrys poverty levels in the medium term. The strategy identifies the main sources of poverty, and aims to assess all sectoral strategies and programs in terms of the extent to which they contribute to reducing poverty. The overall strategy emp hasizes the reduction of inflation and the need to sharply reduce the fiscal deficit, as a key step to reduce the extent of the public sectors crowding out of the private sector in the financial markets, and to help lower interest rates. A microfinance strategy paper was prepared through a consultative process in 2000, but was never taken up by Cabinet before a change of government. The poverty focus has led the new regime to expand directed, subsidized credit programs that are not consistent with best practices in microfinance and tend to undermine development of the industry.

II.

Structure and Performance of Rural and Micro Finance Industry

This chapter analyzes the different types of RMFIs in Ghana and their financial products, from the more formal and licensed to the less formal and unregulated. The financial system in Ghana falls into three main categories: formal, semi- formal, and informal: Formal financial institutions are those that are incorporated under the Companies Code 1963 (Act 179), which gives them legal identities as limited liability companies, and subsequently licensed by the Bank of Ghana (BOG) under either the Banking Law 1989 (PNDCL 225) or the Financial Institutions (Non-Banking) Law 1993 (PNDCL 328) to provide financial services under Bank of Ghana regulation. Most of the banks target urban middle income and high net worth clients. Rural and Community Banks (RCBs) operate as commercial banks under the Banking Law, except that they cannot undertake foreign exchange operations, their clientele is drawn from their local catchment area, and their minimum capital requirement is significantly lower. Some collaborate with NGOs using microfinance methodologies. Among the nine specified categories of non-bank

The upper poverty line in 1998 was set at C900,000, or about US$389 at the time.

financial institutions (NBFIs), 5 the Savings and Loans Companies (S&Ls), which are restricted to a limited range of services, are most active in micro and small-scale financial intermediation using microfinance methodologies. One leasing company has opened a micro- leasing window. Non Governmental Organizations (NGOs) and the Credit Unions (CUs) are considered to be the semi formal system, in that they are formally registered, but are not licensed by the Bank of Ghana. NGOs are incorporated as companies limited by guarantee (not for profit) under the Companies Code. Their poverty focus leads them to relatively deep penetration to poor clients using microfinance methodologies, though mostly on a limited scale. They are not licensed to take deposits from the public and hence have to use external (usually donor) funds for micro credit. Credit Unions are registered by the Department of Cooperatives as cooperative thrift societies that can accept deposits from and give loans to their members only. Although credit unions are included in the NBFI Law, BOG has allowed the apex body Ghana Cooperative Credit Union Association to continue to regulate the societies pending the introduction of a new Credit Union Law. The informal financial system covers a range of activities known as susu, including individual savings collectors, rotating savings and credit associations, and savings and credit clubs run by an operator. It also includes moneylenders, trade creditors, selfhelp groups, and personal loans from friends and relatives. Moneylenders are supposed to be licensed by the police under Moneylenders Ordinance 1957.

The commercial banking system, which is dominated by a few major banks (among the 17 total), reaches only about 5% of households, most of which are excluded by high minimum deposit requirements. With 60% of the money supply outside the commercial banking system, the rural banks, savings and loans companies, and the semi- formal and informal financial systems play a particularly important role in Ghanas private sector development and poverty reduction strategies. The assets of RCBs are nearly 4% of those of the commercial banking systems, with S&Ls and CUs adding another 2%. The term rural and micro finance institutions (RMFIs) is used to refer collectively to the full range of these institutions though recognizing that they use different methodologies to reach different (albeit overlapping) clientele among farmers, rural households, the poor, and microenterprises, and hence that different regulatory and supervisory instruments may be appropriate. Although systematic data are not available across these different categories (see Box 1), the institutions in each segment are discussed below based on the best information available.

Including Credit Unions, which are in the law but have not yet been brought under the jurisdiction of BOG in practice, pending passage of new legislation.

Box 1: Performance Monitoring Data and GHAM FIN Information on the rural and micro finance industry is very dispersed, when it is available. Data on RCBs and S&Ls are available from three departments of BOG (Banking Supervision, NBFI and Research Departments), only some of which is published in its quarterly and annual reports. CUA has information on Credit Unions, but only a small fraction is published in the Annual Reports of the Department of Cooperatives. The information published is scanty and does not address the main issues of RMF development. No consistent data are available on the non-licensed semi-formal and informal RMFIs. An attempt to remedy this situation is being undertaken by the Ghana Microfinance Institutions Network (GHAMFIN), which was established in the late 1990s by a group of RMFIs as a network of microfinance institutions. Its membership cuts across the formal, semi formal and informal institutions and includes consultants, researchers and service providers to RMFIs. Although not all RMFIs are members, it does include the major associations that represent key groups of RMFIs (ARB, CUA, and susu collectors). GHAMFINs objectives include serving as the knowledge center for the industry and monitoring and benchmarking performance. GHAMFIN has developed a monitoring system based on the methodology of the Micro Banking Bulletin, which has been piloted with a small sample of rural banks. It is also undertaking a geographic mapping of different types of RMFIs. When well developed, the benchmarks and performance standards will be reference points that can be used by the unregulated RMFIs (especially NGOs) for self-regulation and by donors, BOG and MOF to monitor the growth and performance of the sector. GHAMFIN also has a simpler survey instrument that would give a basic profile of responding institutions. In 2002-03 GHAMFIN and other apex bodies (supported by GTZ and the Rural Financial Services Project) collected basic data on the size, location and performance of different categories of RMFIs to provide a baseline as a basis for more systematic monitoring in the future.

A. Agricultural Development Bank While the ADB has played an important role in making finance available for agriculture, it suffered from poor economic conditions in the 1970s and early 1980s, poor repayment, and other problems, resulting in negative net worth by the end of the 1980s and restructuring in 1990. Furthermore, the share of smallholder credit in ADBs total lending declined to 15 per cent in 1992, while the share of lending to agriculture fell to 30 per cent, and short-term loans accounted for some 80% of lending (Nissanke and Aryeetey, p.63). The share of smallholders has since risen to 24% in1999 and the share of agriculture loans to 51%. After restructuring of ADB to permit universal banking, its financial profitability has improved, but it has remained subsidy-dependent (Kowubaa 2000, pp.31-32). B. Rural and Community Banks The Rural and Community Banks are unit banks owned by members of the rural community through purchase of shares and are licensed to provide financial intermediation in the rural areas. Rural Banks (RBs) were first initiated in 1976 to expand savings mobilization and

credit services in rural areas not served by commercial and development banks. 6 The number expanded rapidly in the early 1980s in response to the demand for rural banking services created by the governments introduction of special checks instead of cash payment to cocoa farmers. The small number of rural outlets of commercial banks were woefully inadequate to meet the demand to cash these checks, let alone provide other banking services, creating undue hardships on farmers who often had to travel long distances or spend days at the banks to cash their checks. More RBs and agencies were, therefore, hurriedly opened to help service areas without banking facilities. The strong promotion of RBs to service the governments policy of paying cocoa farmers by check had adverse consequences for their financial performance. 7 Through a combination of rapid inflatio n, currency depreciation, economic decline, mismanagement of funds and natural disasters (especially in 1983), combined with weak supervision, only 23 of the 123 RCBs qualified as satisfactory in 1992 when the classification started (Table 2.1). The obvious need for re-capitalization and capacity-building was addressed during 199094 under the World Banks Rural Finance Project, with half of them achieving satisfactory status by 1996 (Table 2.1). The combination of very high (62%) primary and secondary reserve requirements imposed by BOG in 1996 and high T-bill rates helped to reduce the risk assets and increase net worth, further improving their financial performance. The number of RCBs reached a peak of 133 in 1998, but fell to 111 in 1999 with the closure of 23 distressed banks and the commissioning of one new bank. These closures sent a strong signal to the remaining rural banks to maintain or improve their operations in order to achieve satisfactory status. Between 1999 and 2001 there was 64% increase in the number of satisfactory banks.
Table 2.1: Classification of Rural Banks
Category No. of Satisfactory
a

1981 -

1986 -

1992 23

1993 43

1994 57

1995 53

1996 61

1997 59

1998 52

1999 53

2000 64

2001 87

Mediocre Distressedb/ Total

29

106

82 18 123

61 19 123

51 19 127

54 18 125

50 17 128

55 17 131

58 23 133

56 2c/ 111

47 2c/ 114 d/

27 115 e/

Source: Addo 1998, pp.27-29. BOG Annual Reports, Banking Supervision Department a/ Based on compliance with a 6% capital adequacy ratio (a relatively low standard for RMFIs). The classification system was changed in 2002 to focus instead on loan portfolio performance (as a determinant of reserve requirements). b/ c/ Based on solvency. Allowed only to handle workers salary payments . d/ e/ Includes 2 licensed at the end of the year. Includes 1 licensed at the end of the year.

The concept was extended to an urban Community Bank in 1987; see Annex 1. There is no limit on the number of shares that an individual can own. RCBs is used to refer to the entire category (since 1987); RBs is used to refer solely to Rural Banks. 7 The rural banks have been moderately successful at savings mobilization in the rural areas. In 1993 their share of total deposits mobilized and credit extended to the agriculture sector by both banks and credit unions stood at 27 per cent and 18 per cent respectively.but the capital base is weak and paid-up capital, income surplus and reserves constitute only 7.5 per cent of total resources (Nissanke and Aryeetey 1998, p. 63).

During the 1990s, some of the RCBs adopted a more commercial approach and introduced innovative programs often in collaboration with NGOs that offered prove n microfinance methodologies, such as Freedom From Hungers Credit with Education program. A few RCBs have succeeded in expanding to over 20,000 clients and reaching high levels of operational and financial sustainability. 8 The total number of recorded depositors in all RCBs is 1.2 million, with about 150,000 borrowers (some of them groups of 5 to 35 members, so actual outreach is somewhat greater). On average, however, RCBs are relatively small compared even to African MFIs, especially in terms of lending though relatively profitable, thanks in large part to past high reserve requirements and interest rates (Table 2.2)
Table 2.2: Average Size of Ghanas Rural Banks and Credit Unions Relative to African MFIs Indicator (average) Number of clients Loan balance Total loan portfolio Total assets Capital/assets Return on assets African MFIs* 7374 $119 $690,027 $1,612,029 60.3% -16.1% Rural Banks 8488 $30 $251,924 $841,102 2.6% 4.4% Credit Unions 405 $153 $65,180 $110,961 3.5% N/A

Source: Sample survey data from Kowubaa 2000, p.60. S&Ls were not sampled. *From the Micro -Banking Bulletin.

The Association of Rural Banks (ARB) was founded in 1981 as an NGO with voluntary membership, starting with 29 members and reaching 115 at end of 2001. The association was formed out of the need to promote and strengthen the rural banking concept. This is carried out through advocacy and training. Under the Rural Finance Project, financed with a World Bank/IDA credit in 1991, and with DANIDA assistance, ARB trained 2341 directors and 2559 staff members of the RCBs (Osei- Bonsu, 1998). The training has been in the general areas of Governance and Leadership, Management and Operations. ARB has no statutory authority and influences its members through persuasion and training seminars. The association initiated the proposal for the ARB Apex Bank, licensed in 2001 to perform apex financial services for RCBs and, eventually, to take over some supervisory and training functions. The Association will remain an NGO, concentrating on advocacy goals in promoting the rural banking system and maintaining the rural banking network of Directors and Managers. Products and Practices Originally, RBs made standard commercial loans to individuals or groups, often related to agriculture. While term lending may have been justified by the agricultural planting cycle or
8

For example, Nsoatreman Rural Bank was reported in 1998 to have 25,587 depositors (average balance of US$38) and 17,584 borrowers (average loan size US$190), 130% operational self-sufficiency and portfolio in arrears under 4%.

investment in a productive asset, it tended to result in portfolio performance problems, as borrowers had difficulty making balloon payments and RBs had weak capacity to follow up and enforce repayment. During the 1990s, however, a number of the more progressive RCBs drew on emerging microfinance techniques to introduce new programs for saving and credit, often in association with NGOs that could provide the expertise in implementing the approach. Loans of this type are generally short-term (4-6 months) with weekly repayment, averaging around $50-75 but ranging up to several hundred dollars, with compulsory up- front savings of 20% that is retained as security against the loan, complementing group or individual guarantees as the other principal form of security (see Box 2 for four interrelated methodologies).
Box 2: Types of Group and Individual Savings and Credit Programs Group savings with credit: A group of members (whether pre-existing or formed for this purpose) open a joint bank savings account and mobilize initial savings deposits to qualify for a loan. Group savings may be used as security against loans, and also are used to invest in T-bills for the group. Groups usually are made up of 3-4 sub-solidarity groups. Group and individual savings with credit: Group members contribute to both a joint group account and their individual accounts. The group may be a village bank of 25-40 members; or as small as 5 members. While both individual and group savings accounts are used as collateral, the individual account includes the members additional personal savings. Loan repayments are made by individuals but handled through the group account. Examples include Nsoatreman, Bosomtwe, and Lower Pra RBs. Individual savings with group credit: Individuals lodge their savings through the group, which receives a loan for distribution to members after a qualifying period and collection of the required level of savings, and they continue to save into their individual accounts as they repay the loan. The group handles the collection of savings and repayments, acts as the interface with the loan officer, and bears group responsibility for recovery (though the loans are made to individual members). Example: Freedom from Hungers Credit with Education program, operated through Brakwa, Lower Pra, Nsoatreman and Nandom RBs, Bulsa Community Bank, and Womens World Banking Ghana (Quainoo 1997, p. 47). Individual savings with credit: direct lending to individuals, either those who had established a credible history as a member of a group but who need larger or separate loans, or in cases where a group approach is not suitable. Examples: Lower Pra RB; Nsoatreman RBs District Assembly Poverty Alleviation Program.
Source: Chord 2000.

Some RCBs also have tried to develop linkages with susu collectors (GHAMFIN 2001) or have served community-based organizations (CBOs) associated with donor programs. RCBs may also use NGOs to perform ancillary services; for example, Nsoatreman Rural Bank pays a 2% commission to an NGO that helps identify, mobilize and educate rural groups on accessing credit through an IFAD program, as well as to assist in loan monitoring and recovery (Owusu Ansah 1999, p. 13). These growing linkages between RCBs and NGOs, CBOs and susu collectors provide an important foundation for greater outreach to rural poor clients, with the RCBs providing a decentralized network of licensed financial institutions in rural areas and the others providing the grassroots orientation that permits reaching relatively poor, remote clients with small transactions. The Rural Financial Services Program includes measures specifically to promote such linkages, building on such approaches in previous IFAD programs.

To facilitate savings collection, some RBs (such as Akwapem and Lower Pra) have introduced Mobile Banking, whereby officers visit rural markets on certain days to collect savings and provide loans (whether to groups or individuals with guarantors). They consider this to be a profitable formal adaptation of the susu system. C. Non-Bank Financial Institutions Table 2.3 shows the rapid growth in the number of NBFIs following passage of the new law in 1993. 9 Except for finance ho uses, growth has stalled since 1998, in part because new applicants have been unable to keep up with increases in the minimum capital requirement.
Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993 Type of NBFI 1994 1995 Savings & Loan* 2 5 Leasing & Hire Purchase 0. 5 Finance Houses 0. 7 Discount Companies 1 2 Building Societies 1 2 Venture Capital 0 1 Mortgage Finance 0 1 Total (except CUs) 4 23 Source: Bank of Ghana. No acceptance house has been licensed.
*An additional S&L was licensed and began operation in 2002.

1998 7 6 12 3 2 1 1 32

2001 8 6 16 3 2 2 1 38

Savings & Loan Companies Initial licensing of the new S&L category was difficult and long-delayed, as the BOG grappled with how to implement the new law. The required minimum capital (100 million or US$150,000) initially posed a hurdle, but its real value was eroded by rapid inflation, and the number of S&Ls grew from three in 1995 to seven by 1998. By 2002 the eight S&Ls had over 160,000 depositors and 10,000 borrowers. Increases in the minimum capital requirement in 1998 and 2000 restored the dollar value through a ten-fold increase in the nominal value, which stalled the rate of new entry (discussed further in section III.B). As of June 1999, all of the five outstanding applications for S&L licenses lacked adequate capital to comply with the increased minimum which was raised further in 2001 to about US$2 million. Nevertheless, the S&L category has proven to be a flexible means of regularizing three types of MFIs through: transformation of NGOs into licensed financial intermediaries; formalization of actual or potential informal money- lending operations; establishment of small private banking operations serving a market niche.

Credit Unions are discussed separately below because they already existed under a separate regime and have not yet been brought under BOG.

The first license as an S&L went to Womens World Banking Ghana (WWBG) in 1994, representing the first transformation of an NGO into a licensed financial institution. 10 Its success, however, was limited by different views of its mission and commercial orientation between its Board and management and by its failure to establish a high-performing, growing loan portfolio, and it is likely to have difficulty complying with the minimum capital and prudential requirements established in 2001. Sinapi Aba Trust is expected to become the second NGO transformation (discussed below). EMPRETEC, an NGO providing training for micro and smallscale businesses, is also trying to meet the paid-up capital requirement for an S&L. Some of the S&Ls that have become licensed fall into a category that might be termed potential moneylenders who wish to enter the formal financial system to be able to mobilize savings as an additional source of funds. The principal promoters or shareholders of such S&Ls are entrepreneurs with little experience in financial services but who have surplus funds and high motivation. Among the S&Ls, First Allied has become one of Ghanas largest RMFIs, reaching 51,049 depositors with 25.5 billion (US$3.4 million) and 2,820 borrowers with a total loan portfolio of 10.3 billion (US$1.4 million) in 2001, although it serves only the local market around Kumasi, the second largest city in Ghana. The S&L category has also made possible the entry of private investment to serve a particular market niche on a smaller scale than would be required for a commercial bank. The first in this category was Citi S&L, established in 1994 on commercial banking principles but based in local markets with traders and susu collectors as the main depositors. 11 While Citi was an innovator in its linkages with susu collectors and especially susu clubs, its financial performance has been constrained by earlier problems with its loan portfolio. It represents both an interesting success in applying commercial principles to microfinance and innovating in commercial- informal financial linkages; and a challenge to the supervisory authorities in applying the regulatory guidelines to ensure discipline as well as innovation. The advantage of having a regulatory niche suitable for specialized MFIs is also apparent in the establishment of Sikaman S&L Company Ltd., promoted by Internationale Projekt Consult of Germany, which is designed to apply international best practices in microfinance to reach profitable operation in less than two years. Sikaman began operations in 2002 with a staff of 24 as the only S&L whose shareholders are entirely corporate bodies (all but one foreign). 12 The increased paid- up capital requirement diluted the local ownership from 30% to 2.5% when one local partner institution dropped out and the other could not raise the additional funds.
10

Initially, only the Mutual Assistance Susu scheme was licensed, as a subsidiary of the NGO, but subsequently WWBG itself adopted S&L status. 11 Although not originally conceived as a microfinance institution as such, Citis commercial approach to serving essentially the same market soon brought it within the ambit of the international microfinance industry. This enabled it to access not only new approaches and technical assistance, but also funds. Some of these funds, unfortunately, entailed foreign exchange risk, which resulted in conversion of debt to equity when depreciation of the Cedi made repayment impossible to a foreign NGO. With a takeover by new private investors in 2001 to meet the new minimum capital requirements, it is shifting a larger proportion of its loan portfolio toward small and medium-scale enterprises. 12 After raising sufficient capital pledges to reach the required minimum in 2000, the promoters had to return to their foreign shareholders (Internationale Micro Investitionen of Germany, International Finance Corporation of USA, FMO of The Netherlands and Stichting DOEN of The Netherlands ) to meet the revised minimum capital requirement of US$2 million in 2001.

10

Products and Practices The S&Ls generally use the loan products described above under RCBs. For example, First Allied S&L uses a group and individual savings with credit scheme with existing, registered occupation-based groups such as butchers, kente weavers, carpenters, and other associations (Chord 2000). S&Ls have also been leaders in innovating. Citi S&L uses Susu Clubs or any other economic association for their group loan product, with joint group guarantee and savings bank balance up to 50% of loan amount. It has pioneered linkages with susu collectors as well as clubs, including through other forms of individual loan products. Citi also has a micro-leasing product available to clients with at least two successful loan terms (Anin 2000). Leasing Companies Although leasing companies have substantial potential to assist SMEs by solving the collateral problem that makes it difficult for them to obtain loans, this market has so far gone untapped in Ghana. One leasing company initially targeted this market niche in the late 1990s and attempted to set up a Micro-lease subsidiary. However, successive increases in the minimum capital requirement disrupted the planned establishment of this subsidiary as an independently licensed NBFI, and led the leasing company eventually (in 2001) to establish a micro- lease department (mainly for SMEs) as a business line within the existing company, rather than spinning it off. D. Credit Unions Credit Unions are thrift societies offering savings and loan facilities exclusively to members. The first credit union in Africa was established at Jirapa in the Northern Region (now Upper West) in 1955 by Canadian Catholic missionaries. By 1968, when they were brought under legislation and the Credit Union Association (CUA) was formed as an apex body, there were 254 CUs (64 of them rural) with some 60,000 members (Quainoo 1997). The number of CUs continued to grow to nearly 500 by the mid-1970s, but their financial performance was not particularly strong. High inflation in the late 1970s eroded their capital, and by the early 1990s, the number of CUs had fallen by half. Other causes of the decline included droughts in the 1980s, which severely slowed down economic activities, and the Governments labor redeployment exercise, which led to many workers being laid off (Ghana CUA 2002). Many of the remaining CUA members were inactive, especially in community-based ones (Table 2.4). At the end of 2002 CUA had 253 affiliates with 123,204 members (about a quarter of them Study Groups in the process of becoming full credit unions). Credit unions average about 400-500 members, and their average loan size of US$153 is well above that for African MFIs, as well as for RCBs 13 (Table 2.2). The weak financial performance of CUs has been due in large part to their organization as cooperative societies with a welfare focus, and in particular to their policy of low interest rates
13

This is probably because 59% of the CUs are workplace-based, with 71% of the membership serving a more middle-class salaried clientele than the community based ones.

11

Table 2.4: Growth in Credit Unions and Membership, 1968-2001 Year 1968 1972 1976 1980 1984 1988 1992 1996 2000 2001 2002 Number 254 204 457 310 233 330 223 228 225 232 253 Membership 60,000 27,405 48,705 49,103 55,170 65,052 44,068 51,423 70,046 96,052 123,204

Source: Ghana Credit Union Association (CUA).

on loans. 14 While this benefited those members who received loans (usually after long delay, and less than requested), the corresponding low returns on savings (or equity shares) discouraged mobilization of resources. Furthermore, many CUs invested share capital in- group assets such as tents and furniture that members could rent for social events again at favorable rates that meant low return on the investment. CUA is a private association of cooperative societies, independent of the go vernment. While CUA has attempted to establish a financial reporting system for its members, in fact the quality of the data is poor and little used for management purposes by the member societies, whose capacity is quite limited and whose managers, as well as Board and members, tend to have little understanding of the business of financial intermediation. According to CUAs own classification, over 70% of all Ghanaian credit unions were in an unsatisfactory situation as of April 1996, and 42% of them were placed in the worst category (Camara 1996). By the end of 2001, these ratings had improved to 60% and 15%, respectively, and the share given the top rating for financial soundness had improved significantly to 29% (CUA 2002). Products and Practices: Individual members make predetermined periodic deposits15 into their accounts and may borrow up to two times their savings balance. Most CUs require borrowers to provide security, in addition to being in good standing with their deposits. Ideally, this can be in the form of a guarantee from another member of the credit union who has adequate uncommitted savings balance. Some CUs use the susu method in the collection of deposits and loan repayments. CUA is an innovator in providing both credit insurance (which pays off the outstanding loan balance in case of the death of a borrower) and a contractual savings program (which matches savings, up to a limit, if held at death or to maturity) (Gallardo et al. 2002).
14

In 1995 the rate on loans was raised to 3% per month and interest on savings of 5% per quarter was introduced in place of the previous system of charging 1% per month on loans and only paying dividends to shareholders out of year-end profits (if any). 15 CUA regulations state a minimum of 20,000 (US$2.70) for a workplace society and 10,000 (US$1.40) for a community-based society.

12

E. Non-Governmental and Community-Based Organizations NGOs have facilitated the development of good microfinance practices in Ghana by introducing internationally tested methodologies, often in partnership with RMFIs (reviewed in depth in Chord 2000). The methodologies introduced by these NGOs often are based on group solidarity methods, and have benefited from linkages with CBOs that have already come together on the basis of some kind of location, occupations, friendship, family ties, gender, or other grounds to serve a purpose at the community level (Chord 2000, para. 3.2). This can save the long and expensive process of promoting and training prospective groups although some CBOs also have procedures and modalities of doing things that may not suit the micro finance scheme.16 NGOs and CBOs are particularly important in making financial services available in the northern part of the country, where both commercial and rural banks are scarce although they tend to be somewhat localized and dependent on donor funds, in part because the relative poverty of the area and their association with welfare-oriented programs and NGOs. Unlike Uganda, Ghana lacks NGOs whose primary mission is microfinance (Womens World Banking Ghana began as an NGO, but became an S&L). Although some 50 NGOs have active microcredit programs, they are generally multipurpose or welfare-oriented agencies (only four exceed 3,000 clients and total outreach is only about 60,000 clients; GHAMFIN 2003). The principal exception is Sinapi Aba Trust (SAT), which was established in 1994 and presently has 16 branches all over the country, offering both group-based and individual loans. As shown in Table 2.5, SAT has reached financial and operational sustainability and sufficient scale to qualify and succeed as a licensed S&L. The ability to take and intermediate savings would free it from its current reliance on RCBs and other intermediaries to handle clients funds and on donor funds to finance its lending. 17 The SAT S&L would be set up as a micro finance provider separate from SAT NGO, which will provide technical services. While it was ready to meet the previous minimum capitalization of C1 billion, its transformation has been stalled by the necessity to raise 15 times that amount, as well as by the costs of preparing to comply with BOGs rigorous reporting requirements.
Table 2.5: Performance of Sinapi Aba Trust Value of Loans Number of Clients % Women Operational Sustainability Financial Sustainability Default Rate Portfolio at Risk
Source: Sinapi Aba Trust.

1996 0.7 billion 1,741 70% 95% 48% 6.3% 6.9%

2001 28.5 billion 24,396 90% 139% 103% 2.6% 4.0%

2002 Jan.-Mar. 11.5 billion 23,260 90% 199% 140% 3.7% 6.1%

16

For example, one RB reported that the loan repayment of the 31st December Movement (an NGO with political undertones) was only 75% compared to over 80% as the lowest among the other groups (Chord 2000, para. 3.2.3.i). 17 It is affiliated with Opportunity International, and receives funding from the Agence Franaise de Dveloppement, DFID, Hilden Charitable Fund (UK), Microstart (UNDP), and USAID.

13

Products and Practices The models used by NGOs correspond to those described in Box 2, and indeed are often introduced by the NGOs in collaboration with RCBs or other RMFI partners. Village banking is a group and individual savings with credit methodology promoted by some NGOs, notably Catholic Relief Services and the SNV/Netherlands Development Programme. It is an adaptation of the Grameen Bank model as further adapted by K-REP (Kenya), in which both share capital and savings deposits are mobilized from members (with a one-third match from the donor agency, in the case of the SNV program). Loans are made to groups of ten members, but benefiting only half of them at a time and reaching the second half only after repayment of the initial loans. Loans are limited to the combined savings of the individual applicant and guarantor plus the one-third supplement, with an interest rate of 40% per annum (Chord 2000, para. 2.10.2). The village banks are in the process of registering with CUA as Study Groups. Freedom From Hungers (FFH) Credit with Education program uses individual savings with group credit to target women and provide accompanying education on health, nutrition, family planning, financial planning and budgeting, and microenterprise development. Group members make mandatory savings contributions for at least three months before qualifying for a loan. Increasing repeat loans are made on four- month cycles with an interest rate of 3-4% per month. FFH trains the loan officers for partner RMFIs (mainly RCBs) and the groups handle the bookkeeping of members savings and repayments, so the program can be quite profitable although the reserve requirement has constrained growth using RCBs own mobilized savings. An inventory credit scheme developed by one NGO on the warehouse receipts model has led several commercial banks to adopt this form of le nding (Box 3). With respect to linkages between CBOs and RMFIs, conditions for success emerging from an evaluation of different schemes include (Chord 2000, para. 3.2.7): Empowerment of the groups through training and logistic support that enables them to fully co-operate with the MFIs and sustain the project; Frequent reporting that keeps each other abreast with developments in the scheme; Transparency and participatory nature of the interactions; Well-established procedures for record keeping and accountability.
Box 3: Inventory Credit Scheme Technoserve has developed an inventory credit scheme that enables farmers groups to obtain higher value for their crops by providing post-harvest credit through linkage with a RMFI, using stored crops as security for credit, through cooperative group management by farmers producing maize, oil palm and cashews. Instead of selling all of their crop at harvest when prices are lowest in order to meet cash needs, small-scale farmers in the scheme store their crop in a cooperatively-managed warehouse and receive a loan of about 75-80% of the value of the stored crop, which serves as collateral. This loan permits them to clear their accumulated debts and satisfy immediate cash requirements. Subsequently, when prices have risen in the off-season (by as much as double, in the case of maize), the farmers either sell the stored crop or redeem it for home consumption. Even after deducting a storage fee and a margin for the cooperative, farmers typically realize signific ant profits by waiting for the higher prices to sell (or avoiding having to buy at off-season prices for home consumption).
Source: Africa Region 1997; Quainoo 1997.

14

F. Donor Programs Most donor-supported programs use the microfinance methodologies described above under Rural and Community Banks, and often work through existing NGOs and other organizations. Examples include the SCIMP Solidarity Group System (group savings with credit) and ENOWID (group and individual savings with credit) (Chord 2000). G. Informal Finance Moneylenders By the mid-1960s, moneylending had become more of a part-time activity by traders and others with liquid funds than a full- time profession (Offei 1965, cited in Aryeetey 1994, p.16). Loans from moneylenders typically average 3 months and rarely are made for more than 6 months (though some borrowers may take longer). The typical interest rate in the early 1990s was 25-30% for a 3- month loan; this represented a decrease from the 1983 rate of 100% on loans under 6 mont hs, reflecting some market sensitivity to lower inflation and increased liquidity in the post-reform period (Aryeetey 1994, pp. 30-32). Moneylenders invariably require security, preferably in the form of physical assets such as buildings, farmland and undeveloped land. Unlike commercial banks, moneylenders incur little transaction costs in enforcing pledges of such collateral made before family members or traditional authorities, as the moneylender can simply make use of the property until the debt is repaid. Loans to employees, including civil servants, are often secured by an arrangement with the paymaster. Verbal guarantees from family heads, friends and relatives may also be accepted as security. The importance, and certainly the registration, of individual moneylenders may have been reduced by the emergence of rural banks, Credit Unions, susu associations and clubs, and especially S&Ls, which has enabled moneylending-type operations to become licensed. Official statistics indicate that in 1972, there were 33 licensed money lenders in Accra Region. By 1988 the number has dwindled to 4 (Anin 2000). These days most individual moneylenders do not hold licenses or operate full time, and the Ordinance has ceased to be of any importance, although it remains in the statute books. Susu Collectors, Associations, Clubs, Companies and Products The susu system (see Box 4) 18 primarily offers savings products to help clients accumulate their own savings over periods ranging from one month (susu collectors) to two years (susu clubs), although credit is also a common feature. All members of a susu ROSCA group except the last receive their lump sum earlier than if they saved on their own, and susu club operators try to attract more clients by advancing members target savings amount well

18

Although the word susu has meaning in Twi, a Ghanaian language, the system is thought to have originated from Nigeria, where it is known as esusu or osusu.

15

before the end of the cycle. 19 Even susu collectors give occasional advances to their best customers before the end of the month, and in some cases may make loans of up to three months though their ability to do so is constrained by the fact that they generally lack capital apart from the savings they mobilize. In an effort to capitalize on susu collectors intimate knowledge of their clients, several RCBs and S&Ls participated in a pilot program to provide funds to susu collectors for them to on- lend to their clients (GHAMFIN 2001), and some have continued with their own funds.
Box 4: Types of Susu (Savings Collection) in Ghana Ghana has at least five different types of institutions known as, or offering products termed susu Susu collectors : individuals who collect daily amounts set by each of their clients (e.g., traders in the market) and return the accumulated amount at the end of the month, minus one days amount as a commission; Susu associations or mutualist groups are of two types: (i) a rotating savings and credit association (ROSCA), whose members regularly (e.g., weekly or monthly) contribute a fixed amount that is allocated to each member in turn (according to lottery, bidding, or other system that the group establishes); (ii) accumulating, whose members make regular contributions and whose funds may be lent to members or paid out under certain circumstances (e.g., death of a family member); 20 Susu clubs are a combination of the above systems operated by a single individual, in which members commit to saving toward a sum that each decides over a 50- or 100-week cycle, paying a 10% commission on each payment and an additional fee when they are advanced the targeted amount earlier in the cycle; they have existed at least since the mid-1970s, quite likely earlier; Susu companies existed only in the late 1980s as registered businesses whose employees collected daily savings using regular susu collector methodology, but promised loans (typically twice the amount saved) after a minimum period of at least six months.

Some licensed financial institutions (commercial banks, insurance companies, RCBs, S&Ls, and credit unions) have offered a systematic savings plan termed susu, sometimes hiring employees to go out and gather the savings in the manner of a susu collector. The State Insurance Corporation first introduced such a Money Back product in the 1980s, including a life insurance benefit for clients as an additional incentive to mobilize savings, but the scheme was discontinued in 1999 .

The susu collectors are the most visible and extensive form. Even though they mobilize savings, the central bank has refrained from attempting to regulate them, leaving them to try to improve the reputation and quality of the industry through self-regulation (discussed below). 21
19

Citi S&L was able to gain susu club operators as clients not only by providing a safe place for weekly sums mobilized, but also by providing loans that would enable the operators to offer more advances than they would have been able to make out of their own accumulated resources. Operators were willing to borrow at 53% per annum even though they were earning only a 5% fee on early advances plus 10% commission on savings, because being able to make advances to a substantial number of clients improved their reputation and attractiveness to new clients (who pay an up-front membership fee). Another source of profits to operators is that clients who drop out before completing 100 payments do not get their accumulated amounts refunded ostensibly as a means of enforcing savings discipline. 20 The accumulating type is usually larger; a 1993 survey found that they average 37, as against 12 for a typical monthly rotating susu group. 21 Besides the impossibility of actually supervising hundreds of the mobile agents, the amounts of individual savings at risk are fairly small (since they are accumulated only a month at a time; and since susu collectors typically put their collections in commercial bank accounts).

16

There are eight regional susu collectors cooperative societies, which are grouped into the national Ghana Co-operative Susu Collectors Association (GCSCA). Registered members account for nearly a quarter of the estimated over 4,000 collectors nationwide, collecting an average of US$15 a month from approximately 200,000 clients (GCSCA 2003). The one type of susu institution that has come under formal regulation (apart from susutype products offered by licensed financial institutions) was the susu companies, whose guarantee of loans of double the amounts saved, combined with mismanagement of funds, made them unsustainable. Passage of the NBFI law essentially terminated this practice as a semiformal financial activity carried out by registered businesses, and required that they raise sufficient minimum capital and become registered as an S&L (which Womens World Banking Ghana did for its susu scheme). Some commercial banks have introduced savings products modeled after and advertised as susu. Likewise, both Nsoatreman Rural Bank and First Allied S&L have a susu scheme in which clients can borrow a multiple of their savings after three months, while a portion of the savings (20-25%) is kept as security in a savings account (Chord 2000). Ahantaman Rural Bank has a similar scheme, but works with clients in groups, and offers larger depositors the additional incentive of participation in a raffle. In these cases, daily collection is carried out by sala ried or commissioned agents, whereas Citi S&L works primarily through susu club operators, with services that include receiving their weekly collections, providing checks for clients who are selected to receive their target sums in advance, and making loans to the operator. These methodologies have been particularly effective in reaching lower-income brackets and women, who constitute 65% to 80% of the clients of these susu schemes. Thus, the combination of specialized categories of licensed financial institutions and traditional methodologies has succeeded both in mobilizing savings from lower- income households and giving them access to financial services that are part of the formal, supervised system. 22 In addition, some NGOs have utilized susu collectors to achieve their objectives, notably Action Aid in the Northern and Upper East Regions to reach communities with little or no access to formal financial institutions. In this scheme, community committees select susu collection agents from the local community to work with credit assistants, both to mobilize savings from the remote communities and to collect loan repayments (Quainoo 1997, p. 45). Traders A major component of rural finance in Ghana has always been the traders who operate between producers in rural areas and urban markets, and often provide credit in the form of inputs on suppliers credit or an advance against future purchase of the crop. Traders do not usually require collateral, but rather the agreement of the farmer to sell them the crop over an agreed period; the implicit interest rate can be as much as 50% of the principal for the farming season (Offei 1965, cited in Aryeetey 1994 p.16). Fish traders similarly use advances to lock in their suppliers at relatively low prices. While these middlemen are often regarded as exploitative in view of their monopsony power, for a large number of farmers and fishermen, access to
22

Introduction of the susu scheme by Nsoatreman helped accelerate the annual growth of its savings portfolio from 25% in 1998 to 71% in 1999 (Chord 2000).

17

financing depends heavily on the liquidity available from these traders and hence, in turn, on the ability of traders to access funds. Other Informal Mechanisms Apart from traders and moneylenders, loans from relatives, friends and neighbors constitute the other main source of credit available to farmers (Aryeetey 1994, p.16). In addition, the traditional nnoboa system of mutual assistance through labor exchange sometimes includes financial arrangements (and indeed, may constitute an origin of the susu rotating savings and credit system). H. Government Credit Programs The Government has launched a number of special credit schemes since 1989, usually at subsidized rates, reaching very few people, and with extremely poor recovery rates. A partial exception has been Enhancing Opportunities for Women in Development (ENOWID), which in the early 1990s made over 3,500 relatively small loans (over 6 years) with a cumulative recovery rate of 96% using funds from the Programme of Action to Mitigate the Social Costs of Adjustment (PAMSCAD) (Quainoo 1997). 23 PAMSCAD, launched in 1989, reached an average 83% cumulative recovery by the end 1996 (after substantial efforts to improve recovery), but only some 1,200 clients. None of the other four programs being administered by the National Board for Small-Scale Industries (NBSSI) (which charges 20% interest) has reached a 70% recovery rate or as many as 200 clients. 24 As a result, these revolving funds are depleting in nominal as well as real terms, even without counting the substantial costs to Government of operating them, with a negligible outreach averaging fewer than 60 loans a year (apart from ENOWID). The Government has also entered into microcredit through poverty alleviation programs and the District Assembly Common Funds. While in some instances this has served to make wholesale funds available to local RMFIs for on- lending, more commonly it has been perceived and used as politically motivated loans, with negative consequences for repayment. The government in 2001 came out with an Emergency Social Relief Project meant to provide US$57 million in business loans to the economically active poor at 20% interest rate over 2002-04. Disbursements are made through RCBs, S&Ls and NGOs, who evaluate the beneficiaries. The main threat to sustainable rural and micro finance from these government programs comes from the negative effects on efforts of RMFIs to mobilize savings and to collect from borrowers, whose willingness to repay typically is low when loans are known come from government or donor funds at subsidized rates. A particular hazard for RMFIs that handle such funds is that poor repayment may spill over to their own portfolio.

23

The reported recovery rate is not necessarily sustainable, depending on how it is measured and the term of the loans. The program metamorphosed into an NGO (ENOWID Foundation) and expanded its clientele to 3,399 women in 1999, but with an arrears rate of 35%. Subsequent efforts brought reported arrears down to 2% in 2001 with 2,623 clients and operational sustainability of 64%. 24 The Developing Cottage Enterprise Project (1989), NBSSI Revolving Fund Scheme (1992), NBSSI/DED Credit Scheme (1993), and NBSSI/NFED-Dev. Assistance (1994) (Quainoo 1997).

18

III.

Licensing and Regulatory Framework for Rural and Micro Finance

A. Structure and Origins of the Licensing Framework Formal banking began in Ghana (then the Gold Coast Colony) in 1896 with a branch of the Bank of British West Africa (Fry 1976) followed by Barclays Bank DCO in 1917 (Crossley and Blandford 1975). Both banks were operated and supervised as branches of their head offices in London. The first indigenous bank was the Gold Coast Cooperative Bank, which was established in 1945 with a share capital of 30,020 as a registered cooperative society under the Department of Cooperatives. The main business was to support the marketing societies to buy cocoa from the farmers. The registration was cancelled in 1961 and its operations absorbed into the Ghana Commercial Bank (Republic of Ghana 1970). In 1953 the Bank of the Gold Coast was established by Statute as the first indigenous commercial bank with some central bank functions. It was only at independence in 1957 that the central banking functions and the commercial banking functions were separated between the Bank of Ghana and the Ghana Commercial Bank respectively. The banking system was subsequently regulated under the Bank of Ghana Act of 1963 (updated in 1992) and the Banking Act of 1970 (updated in 1989). A new Ghana Cooperative Bank was registered in 1970 with the Department of Cooperatives and started operations in 1974. In 1975/76 its operations encroached on the provisions of the Banking Act 1970. This created regulatory conflict, which was finally resolved by the passage of a legislative instrument restricting the use of the word bank in an institutions name to those licensed under the Banking Act. The restructured Ghana Cooperative Bank was thus brought under the authority of the Bank of Ghana, despite protests from the Department of Cooperatives that, by the Cooperative Decree, it was the sole province of Cooperatives. The new Cooperative Bank had private individual and institutional shareholders, in addition to the cooperative societies. The first formal micro finance institution in Ghana arose out of the micro savings product of the Post Office System. The service was upgraded to Post Office Savings Bank under the Savings Bank Act 1962 (Act 129), to operate independently within the Post Office System. It attained full bank status as National Savings and Credit Bank in 1972 under NRC Decree 38. The new management abandoned the use of the network of the Post Office System and developed its own, leading to the destruction of the micro savings product (Anin 2000). Different tiers of Ghanas legally recognized, specialized RMFIs come under different legislation, adopted at different points in time in response to different circumstances and objectives: Moneylenders: Moneylenders Ordinance, 1940 and 1957. Credit Unions: Co-operative Decree, 1968 (NLCD 252); also the NBFI Law; Rural Banks: Banking Law, 1989 (PNDCL 225) Savings & Loans Companies: Financial Institutions (Non-Banking) Law, 1993 (PNDCL 328) (NBFI Law).

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These laws and their origins are discussed in detail in Annex 2 and summarized in Annex 3, Schedule 1. The remainder of this Chapter discusses the application of regulations within this framework. B. Evolution of Regulatory Norms This section discusses the evolution of regulations applicable to institutions that are licensed as financial intermediaries. Prudential regulations refer to the standards and guidelines the financial institutions must meet in order to obtain or retain a license from the central bank, which assumes responsibility for assuring the soundness of licensed institutions (summarized in Annex 3, Schedule 2). Regulations governing registration as a business (which applies to NGOs and other semi- formal organizations that are not licensed by BOG) are covered in Chapter IV. Until 2001 the regulations governing NBFIs did not differentiate between different institutions according to the nature of their activities. During 2001 BOG came out with a new set of Business Rules for application of the NBFI law, distinguishing between deposit-taking and non-deposit-taking institutions. These Rules clarify procedures for compliance with capital adequacy and solvency requirements (10% capital adequacy ratio for deposit-taking NBFIs and 10:1 gearing ratio for non-deposit-taking NBFIs); define individual and group-based loans for microfinance and small business, with single-borrower limits for individual loans; and establish criteria for cla ssifying microfinance loans into current and delinquent, provisioning standards for delinquent loans, and liquidity reserve requirements. Adoption of these Business Rules reflects growing understanding by BOG of ways in which MFIs and other NBFIs differ from commercial banks and of the value of focusing regulation on the nature of the activities being undertaken. The Rules have clarified the prudential expectations of the BOG. Better understanding of the requirements by the NBFIs has led to more accurate reporting, and some have brought in well-qualified people for their management and boards. BOG has since enforced penalties for breaches of regulatory requirements. NBFIs are required to give action plans and definite time frame for the implementation of recommendations. These new Business Rules group NBFIs into four categories of licensed institutions for differential treatment (excluding credit unions, for which a separate legal, regulatory and supervisory framework is being prepared): A. B. C. D. Deposit taking institutions (other than discount houses); Non-deposit taking institutions in credit business; Discount houses; Venture capital fund companies.

Deposit-taking institutions are more tightly regulated, through higher levels of minimum initial capital, capital adequacy standard and mandatory holding of liquid reserve assets. Since the Rules apply only to licensed institutions, they appear to leave the door open for nonfinancial NGOs to engage in credit activities using their own funds. However, they do block mobilization of savings by other registered companies (such as the ill- fated susu companies of

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the 1980s, and, more recently, businesses operating pyramid schemes, which BOG has actively shut down):25 Notwithstanding the general permission provided in Section 11(1) of the Law, a licensed company, other than a Savings Institution, desiring to solicit and take public deposits, shall seek and obtain specific deposit taking authorisation from the Bank of Ghana additional to the business license. Minimum Capital Requirement Under the old Banking Act (1970), a bank was to maintain a minimum paid-up capital of 0.75 million (US$0.65 million) for Ghanaian banks and 2 million (US$1.76 million) for foreign banks. After a period of rapid inflation and currency depreciation, the 1989 Banking Law raised the nominal minimum paid-up capital, but not enough to restore the dollar values until a further major increase in 2000 (Table 3.1). Another major increase followed in 2001, bringing the minimum capital requirements to 25 billion (US$3.3 million) for Ghanaian banks, 50 billion (US$6.7 million) for foreign banks, and 70 billion (US$9.3 million) for development banks as of 2002.
Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$ Type Comml banks: Ghanaian* Foreign Devt banks Rural banks NBFIs: Deposit-taking Non-deposit 1993 1998 2000 Cedis (billion) 0.2 0.5 1.0 0.01 0.1 0.1 0.2 0.5 1.0 0.03 0.5 0.5 5.0 8.0 10.0 0.1 1.0 0.5 2001 25 50 70 0.5 15 10 2002 25 50 70 0.5 15 10 1993 1998 2000 US dollars (million) 0.31 0.77 1.54 0.015 0.15 0.15 0.09 0.22 0.43 0.013 0.22 0.22 0.94 1.5 1.9 0.018 0.19 0.09 2001 3.52 7.04 9.85 0.07 2.1 1.4 2002 3.33 6.66 9.33 0.067 2.0 1.3

Source: 2000 from Gallardo BTO report; 2001 from Addeah 2001 (updated). Average annual exchange rates (/$): 1989 270; 1993 649; 1998 2314; 2000 5322; 2001 7104; 2002 7500 (first quarter). *60% of shares owned by Ghanaians.

While definite amounts were prescribed for the above- mentioned categories of banks, the BOG was left to determine the paid-up capital for the Rural Banks. Initially BOG based the minimum capital requirement of 50,000 26 on the start-up needs for fixed assets, stationery, rent for accommodation, etc., while BOG provided the working capital requirement for the initial six months as Preference Share Capital. In 1994 BOG decided that the shareholders of the rural banks should bear the full cost of the banks capitalization, and it stopped providing initial
25

As informal individual agents without corporate identity and business license, susu collectors and operators of susu clubs, as well as susu groups (ROSCAs) would appear to remain outside the law, and BOG officials have repeatedly indicated no interest in attempting to supervise them, but rather the need to observe their activities for possible infringement of the laws. 26 Nearly US$20,000 at the overvalued exchange rate in the late 1970s, but considerably less at parallel market rates.

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working capital. The minimum paid-up capital was then fixed at 20 million (US$22,000). By 1998 BOG was becoming more concerned with the threat posed by poor portfolio and noncompliance with capital adequacy ratios in a number of rural banks and S&Ls, and raised the minimum capital requirement. It has since been adjusted twice, though not as drastically for RCBs as for other categories, standing at 500 million (US$67,000) as of 2002 (Table 3.1). RCBs have attempted to raise additional capital to comply with minimum capital and capital adequacy requirements through appeals to both existing and potential new shareholders and by requiring customers (especially salaried workers) to purchase shares. Nevertheless, only 30 RCBs ha ve been able to keep pace with the increase from 30 million to 100 million in 1999, let alone the further increase to 500 million in 2001. Difficulties in mobilizing funds arise because of non-payment of dividends since inception, shareholders perception that they are entitled to be given loans as shareholders, lack of confidence in the RCB, and local politics that may engender hostility against RCB leadership. The Financial Institutions (Non-Banking) Law of 1993 prescribed a uniform minimum paid-up capital of 100 million (US$154,000) for all categories of NBFIs. As noted above, this has since been reviewed administratively by the Bank of Ghana to differentiate the capital requirement of deposit-taking institutions from that of non-deposit taking institutions. As shown in Table 3.1, the increases in required minimum capital in 1998 and 2000 served mainly to restore the value to the 1993 level in dollar terms. Nevertheless, this represented a tenfold increase in cedi terms, which only 3 of 8 S&Ls were able to achieve. Reasons for difficulties in compliance include: low initial paid-up capital; lack of additional funds among present shareholders; unwillingness of present shareholders to cede some of their shares and dilute ownership by increasing the number of shareholders; and poor operational performance and profitability. In 2001, concerns about the health of the majority of the S&Ls and severe undercapitalization of the NBFIs, and perhaps about the rising number of applications relative to limited supervision capacity, led BOG to substantially raise the minimum capital requirements for NBFIs to 15 billion (over US$2 million) for deposit-taking institutions and 10 billion (US$1.4 million) for non-deposit-taking institutions. This increase was far more than necessary to adjust for the substantial depreciation of the Cedi in 2000-01, and the increase was proportionately greater for NBFIs than for commercial banks, suggesting that the intent may have been in large part to ease the burden of supervision by limiting the rate of entry and perhaps encouraging some consolidation. 27 So far, the regulatory authorities have refrained from closing down existing S&Ls that cannot meet new requirements. Liquidity Reserve Requirements All banks and deposit-taking commercial institutions are required to maintain a proportion of deposits in the form of liquidity reserves, consisting of primary reserves in cash and balances with other banks and secondary reserves in Government and BOG bills, bonds and
27

As of 2001, applications pending for licensing included five S&Ls, eight finance houses, and some other NBFIs. The new requirements were being applied initially only to new applicants; existing NBFIs were given some time to comply, and some S&Ls were taking on or seeking new partners or equity funds.

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stocks. The reserve requirements of 10% for primary and 15% for secondary have remained unchanged for S&Ls since 1993. The primary reserve requirement for commercial banks was reduced from 18% in 1996 to 9% in 2000, while the secondary reserve requirement was raised from 24% in 1996 to 35% 1999. In fact, the high returns on the relatively risk-free secondary reserve assets (T-bill rates averaged 35% from 1993 to 2001, ranging from 24% to 43%) made the requirement virtually redundant, as they accounted for as much as 75% of the combined total deposits of commercial banks (Camara 1996). As part of the Governments efforts to soak up liquidity, and also to improve the solvency of RCBs by reducing the substantial delinquent loans on their books, in 1996 BOG raised the secondary liquidity reserve requirement of RCBs from 20% to 52% (the primary liquidity reserve of 10% was not changed). The combined reserve requirement of 62% served to restrain lending by RCBs although in practice most RCBs have held more than the required amount in T-bills and other reserve assets. While originally intended to strengthen poorly-performing institutions, the regulations did not distinguish between stronger and weaker ones, thereby penalizing the more efficient and commercial RCBs by limiting their ability to pursue profitable lending opportunities. In 2002 BOG lowered the reserve requirements and varied them according to a classification system based on loan recovery performance, enabling those with good recovery to extend more credit and forcing relatively high liquidity on those with weaker recovery (Table 3.2).
Table 3.2: New Reserve Requirements for Rural and Community Banks (as percentage of deposits) Classification Placements with ARB Apex Bank* Primary reserves Secondary reserves Total
*Intended to facilitate check clearing

Loan Recovery Rate A. 90% or more B. 75-90% 5 8 20 33 5 8 25 38

C. Below 75% 5 8 30 43

Interest Rates The 1951 Revision of the Money Lenders Ordinance (Cap 176) stated, charging interest rates in excess of that provided by Cap 176 will render the transaction void and unenforceable (Brobbey 2000, p.60). Nevertheless, this mainly affected the ability of moneylenders to recover through the courts; there was no systematic effort to restrain moneylenders rates, as these regulations were barely enforced (Aryeetey 1996, p. 62), and the moneylenders had their own ways of enforcing their transactions outside the judicial system. During the 1970s and early 1980s, the government controlled interest rates and sectoral allocation of credit. These and other restrictive policies no doubt retarded development of Ghanas formal financial system. However, contrary to the hypothesis that such financial repression can explain the existence of informal finance with unfettered interest rates, various forms of informal finance predated financially repressive policies in Ghana, and, furthermore,

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they actually expanded after financial markets were liberalized in 1987 as part of the Economic Recovery Programme (Aryeetey 1994). Although interest rates have not been officially controlled since 1987, the Government has nevertheless introduced a number of credit programs targeted for small business development or poverty alleviation whose interest rates are set well below market-determined rates. Indeed, District Assemblies have been mandated since 1979 to provide 20% of their Common Funds for micro and small enterprises at an interest rate of 75% of the commercial bank rate. Furthermore, the Government in 2001 has pegged the interest rate for loans under the poverty reduction strategy at 20%. Check Clearing The Rural Banks, credit unions and S&Ls are not directly included in the central check clearing and payments system. This is part of the trade-off that allows the entry of specialized financial institutions with lower minimum capital than commercial banks, and is intended to mitigate the risks of relatively weak internal controls. BOG cancelled check-clearing services for RBs in 1992, and did not allow fo r participation by NBFIs. The demand for check-clearing services is one of the key motivations for RCBs to establish and join the new ARB Apex Bank, which is a member of the Clearing House and hence can service its members. At least one S&L issues checks that can be cashed only at its branches. BOG consider that S&Ls are licensed to operate as savings institutions and not as general deposit institutions, and it is not in favor of them issuing their own checks. Security Licensed banks normally require that loans be secured by title to land or physical assets, deposit balances, or T-bills, following BOG guidelines for rating portfolio quality. These options are clearly beyond the reach of poor households in the rural and urban areas. Close coordination between the Ministry of Finance, BOG and the Ghana Microfinance Institutions Network (GHAMFIN) has led to a better understanding of the characteristics of microfinance loans and the methodologies underlying high repayment rates (Gallardo 2002, p.14), and personal and group guaranteed loans are now recognized as secured microfinance loans. 28 Delinquency and Provisioning All licensed financial institutions are required to monitor and review their portfolio of credit and other risk assets at least once every quarter on a regular basis. For NBFIs, assets are classified into four grades of risk: (i) current; (ii) sub-standard; (iii) doubtful; and (iv) loss. Assets in risk grades (ii) to (iv) are considered non-performing and, therefore, no income may be accrued on them. BOG has specified prudential norms for microfinance and small business loans that take into account the characteristics of these activities. Micro and small enterprise loans are required to be reviewed once monthly and are to be classified into (i) current or (ii)
28

Ideally, RMFI loan portfolios should be risk-weighted based on their repayment track record and the quality of the systems used to manage them. The promise of repeat loans and the pressures of group or personal guarantees, and sometimes pledges of movable assets, are methods used by RMFIs to achieve exceptionally high repayment rates often higher than commercial bank loans secured by titles to property.

24

delinquent. A delinquent loan is one on which payment of interest or scheduled payment of principal has not been received as of due date. BOG does not permit interest income to be accrued on delinquent loans accounts (Gallardo 2002). Provisioning for delinquent microfinance and Loans small businesses loans is made on a basket basis, rather than an individual loan basis. Basket-based provisioning involves making a blanket provision for the aggregate outstanding balances of loans grouped in each arrearage basket, without regard to any security available for individual loans. The prescribed rate of provisioning is shown in Table 3.3.
Table 3.3: S&L Provisioning Rates for Micro & Small Business
Number of days delinquent Up to 30 days 30 days and less than 60 days 60 days and less than 90 days 90 days and less than 120 days 120 days and less than 150 days 150 days and less than 180 days % 5 20 40 60 80 100

In addition to the specific loss provisions to be made for delinquent or non-performing microfinance and small business loans, BOG requires licensed MFIs to maintain a general loss provision of 1% of the aggregate outstanding of all the current or standard class of loan assets. Financial institutions are also required to separately disclose, in their financial accounts and reports, the specific and general loss provisions made for non-performing delinquent loans and standard/current loan assets (Gallardo 2002, p.14).
Table 3.4: RCBs Provisioning Rates

Assets of all banks, both major and rural, are classified into five grades of risk, for which the rate of provisioning is shown in Table 3.4: (i) current; (ii) other loans especially mentioned (OLEM); (iii) substandard; (iv) doubtful; and (v) loss. Other Prudential Regulations29

Current OLEM Sub-standard Doubtful Loss

Past Due >30 days > 90 days >180 days >540 days

Rate % 1 10 25 50 100

In supervising credit unions, CUA applies the PEARLS system of the World Council of Credit Unions in order to evaluate Protection, Effective financial structure, Assets Quality, Rates of Return and Costs, Liquidity and Signs of Growth. This helps it to assess when a particular CU should be stopped from making further loans and given technical assistance to restore its financial health. Credit Unions seriously in breach of compliance and performing poorly are down graded to Study Group status.
29

Additional special regulations for RCBs include prohibition on paying dividends for 10 years after commencing business; the cooperative principle of one shareholder, one vote (irrespective of number of shares); and prior clearance by BOG for loans of C2 million or above to a single party, as well as all loans to RCB directors or companies in which they have a financial interest. Furthermore, BOG has moved to restrict RCBs from operating Agencies in urban areas, which some RCBs have undertaken (not always with prior permission of BOG, as required by law) to facilitate their rural customers making transactions in urban markets, where they sell their produce, as well as to mobilize savings through more convenient facilities than commercial banks offer. BOG considers that operating such agencies without good MIS coordination between head office and agency opens up the potential for abuse or mismanagement, was getting some RCBs into large loans beyond prudential norms, and diverts the RCBs from their intended rural focus as the Chief Executives relocate in the urban areas. However, BOG does not appear to object to such RCB Agencies in rural or even peri-urban areas, if properly applied for and managed.

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Capital Adequacy Prior to the promulgation of the Banking Law (1989), banks were to maintain a minimum capital of 5% of total mobilized resources. Thus, the adequacy of capital was in a direct relationship with deposits. Following international best practice, the Banking Law (1989) shifted the adequacy of capital to its relationship to the risk assets (Asiedu-Mante 1998). The Banking law prescribes the capital base at 6% of the adjusted asset base as the minimum capital adequacy ratio for the banks; this will be raised to 10% under the new Banking Law (in draft). The NBFI Law already prescribes the rate of 10% for S&Ls and other deposittaking institutions. Likewise, Credit Unions are to maintain 10% of their total assets as capital (including shares). Credit Exposures Both the Banking Law and the NBFI Law set different limits for banks and non- banks on credit exposure to individual customers (Table 3.5). Banks are restricted from granting secured loans in excess of 2% of net worth to any firm in which any of the banks directors or officials are connected as a partner or principal shareholder. For unsecured insider loans, the exposure limit is 0.67% of net worth.
Table 3.5: Credit Exposure Limit as Percentage of Net Worth Secured Loans Unsecured Loans Banks 25 10 Non-Banks 15 10

C. Supervision and Monitoring Mechanisms BOG has legal authority over all banking and credit institutions, whether formal or informal (Addeah 2000). Among its functions stipulated by the Ba nk of Ghana Act 2002 (Act 612) are to regulate, supervise and direct the banking and credit system and to license, regulate, promote and supervise non-banking financial institutions. The NBFI Law gives BOG the supervisory authority in all matters relating to the businesses of any non-bank financial institution licensed under the law. The 1992 (current) Constitution empowers BOG to operate a banking and credit system to promote economic development in Ghana. BOG has used its authority to intervene and close down dubious and fraudulent financial practices such as pyramid schemes, as well as insolvent banks. The supervisory functions of the BOG arising out of these laws have been carried out from two departments: the Banking Supervision Department and Non-Bank Financial Institutions Department. The latter was established in 1994 to oversee the licensing of NBFIs under the new Law, supervise and regulate them, and provide advisory and promotional services.

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It was put under the Banking Supervision Department in 2002. Until 2002, a separate department was involved in promoting RCBs and, to some extent, following up on supervision issues. 30 Methods The methods employed by the BOG for its regulatory functions are: off-site surveillance; on-site examination; follow-ups; and special assignments. Off-site examination entails the analysis of prescribed reports submitted periodically by the bank or NBFI. The prescribed reports are meant to provide information on the performance of the S&L or the rural bank (Annex 4). The analysis aims to verify compliance and performance on an on- going basis, based on Capital adequacy, Assets quality, Earnings and Liquidity (CAEL; management is omitted). On-site examination entails the supervisory staff physically going through the books, records and data to assess the accuracy of the reports submitted and to review in detail the compliance and performance of the S&L or RCB based on Capital adequacy, Assets quality, Management, Earnings and Liquidity (CAMEL). The Bank ing Law enjoins this assignment to be undertaken at least once a year for each bank, while the NBFI Law is silent on frequency. Follow-up on-site visits are undertaken to discuss supervisory concerns raised during examinations and to ensure compliance with recommendations. Special Assignments almost always involve on-site activities, such as investigations with respect to concerns. In order to manage the risks to control systems from RCB Managers staying on for years without taking their annual leave, BO G has established a special pool of nine experienced commercial bankers to relieve RCB Managers so that they can take their annual leave. A relief manager spends on the average 6 weeks at a rural bank. Special assignments may also be undertaken to investigate embezzlement, irregular payments, manipulation of customers accounts, granting of unauthorized facilities, and illegal discounting of T-bills. Besides minimizing fraud and enhancing internal controls, these special assignments have helped raise the skills of RCB staff, improved credit administration and the submission of prescribed norms, restrained undue interference by Board members and local authorities, and raised customer confidence in RCBs.

30

Prior to 1989 rural banks were supervised by the Rural Banking Department (later renamed Rural Finance Department). In 1989 BOG transferred the research and supervisory functions of the Rural Finance Department to the Banking Supervision and Research Departments, respectively. The departments name was again changed to Rural Finance Inspection Department, and its responsibilities included follow-up on issues arising out of banking supervision reports and management audits as its primary function. The department also assisted rural banks through advice and resolution of problems. The department was later merged with the Development Finance Department to form the Rural and Development Finance Department. This new department was itself abolished in 2002, with its functions assigned to the Banking Supervision and Research Departments and other departments (and perhaps implicitly to the newly constituted ARB Apex Bank).

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Compliance Enforcement mechanisms available to BOG include fines, suspension, revocation of license, criminal penalties and appointment of auditors and managers (Addeah 2000). Twentythree distressed RBs have had their licenses revoked. BOG has been concerned about irregular submission of prudential reports, and has begun applying fines for late returns and reporting noncompliance due to negligence of the executive to the RCB Board. Some RCBs hide behind poor communication systems to delay the submission of their reports. Despite numerous training exercises provided by the BOG, ARB and donor organizations, some RCBs still have difficulties in completing the report schedules with adequate accuracy. The level of accuracy and punctuality in the submission of the returns has been observed to reflect how well the RCB is performing; well-performing banks tend to submit accurate reports on time. S&Ls and RCBs with weak compliance invariably do not use the reports as tools for management information, regarding them simply as information the BOG seeks for its own use. Since prudential regulation seeks to ensure the safety, soundness and stability of the financial system, it does not cover some types of information such as growth in borrowers, percentage of female borrowers, number of loan officers, etc. needed by an MFI to assess performance in meeting its objectives. The Credit Union Association serves as a self-regulatory apex body for the 232 credit unions (as of 2002), and its norms must be met as a condition for full registration of a new credit union by the Department of Cooperatives. 31 CUA applies prudential norms that are similar to the operating and financial standards of the World Council of Credit Unions (WOCCU). As of 2002, BOG continues to refrain from applying the regulatory functions authorized by the 1993 NBFI Law. The proposed new Credit Union Law would help clarify the delegation of specific supervisory functions to CUA, which will report to a Supervisory Board with BOG membership rather than to the Department of Cooperatives as at present. CUA enforces its regulations by downgrading CUs that are seriously in breach of compliance to Study Group status. One CU that was operating outside CUAs regulation has been forced to close down. The Ghana Co-operative Susu Collectors Association (GCSCA) imposes a number of regulatory barriers to entry as well as providing services to its members. A prospective member must be recommended by a zonal executive, provide two sworn guarantors, deposit 1 million (about US$130) into a security fund, save 5,000 a month, take a medical examination, and undergo a three- month training with an existing member. Other measures intended to improve the confidence of the public in doing business with members of GCSCA include wearing uniform colors, paying off clients deposits from the security fund in case of the death or disappearance of a collector, and assisting in arbitration of disputes. The entry requirements are sufficiently onerous that about half the susu collectors in the Greater Accra area are reported to be fully informal, i.e., not registered with GCSCA. GCSCA attempts to monitor performance of

31

In 2000 only 159 of the 219 credit unions registered by the Department of Cooperatives were considered by CUA as full-fledged financial cooperatives; the remainder were undergoing a process of institutional and membership development in order to be certified by CUA as full-service credit unions ready for registration. [Back-to-Office Report notes for Gallardo 2002.]

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the industry by collecting quarterly data from its zonal societies on the number of clients, amounts mobilized, problems encountered, and assistance given. D. Performance of the Supervision System In 2000, only about two-thirds of NBFIs were examined, with a focus on those taking deposits. The costs of supervising a large number of small NBFIs and rural banks are high in both staff resources and transportation, and BOG has struggled to perform regular on-site examination. There are 23 supervisory staff who are handling the 115 rural banks with total assets in 2001 of 518 billion as compared with 30 supervisors assigned to the 17 major banks with total assets of 14,436 billion (Table 3.6). The Banking Supervision Department covered 97% of the rural banks in 2000 and reached 100% coverage in 2001. The NBFI Department had 100% coverage of the S&Ls (with total assets of 78 billion) in 2000 and 2001. The World Bank-supported NBFI Project in the late 1990s and extending through 2002 has helped to strengthen the NBFI and Banking Supervision Departments supervision capabilities. 32 CUAs annual audit covered 92% of the CUs in 2001, and had reached 90% by the end of March 2002. Teams of two persons undertake the audits, consisting of a CUA staff member and another from the Department of Cooperatives. Credit Unions pay CUA 150,000 (US$20) per day for the annual audit, which takes a minimum of 4 days. 33 The amount is shared between CUA and the Department of Cooperatives in the ratio of 3:1 (CUA is responsible for all staff travel and transport costs). In 2002 CUA members ratified a resolution empowering CUA to sanction CUs and their staff.
Table 3.6: Selected Balance Sheet Items (2001) ( million) Rural Banks S & Ls Major Banks Paid-up Capital 9,577 7,684 166,167 Deposits 380,383 67,256 8,799,573 Borrowing & Other 62,032 172 3,047,452 Liabilities Investments 246,053 23,405 3,357,978 Loans & Advances 144,853 28,062 5,344,591 TOTAL ASSETS 516,327 78,638 14,433,659
Source: Bank of Ghana. Exchange Rate: US$1 = 7,104.

Strengths in Supervision BOGs ability to supervise is well grounded in effective empowering laws and supported by a proactive judiciary. Supervision of RMFIs is simplified somewhat by the less cumbersome prudential reporting required of these categories, compared with countries whose laws and regulatory requirements do not distinguish between different types of financial institutions.
32

The Banking Supervision Department had previously benefited from capacity building and technical assistance under the Financial Sector Adjustment Project, financed by the World Bank/IDA. Supervision of RCBs takes about 6 staff-weeks, S&Ls about 3-4 staff-weeks (no data are available on the monetary costs). Commercial banks, RCBs and NBFIs do not pay for supervision by BOG; auditing fees for RCBs average around 10 million. 33 17% of the less well endowed CUs were allowed to pay less than the C600,000 minimum.

29

Sustained capacity-building efforts with World Bank support have built up BOG staff skills and the adequacy of logistical support. 34 Enforcement procedures are transparent. Holding briefing sessions before on-site examinations has helped to smooth the process, at least with those RMFIs capable of meeting the requirements. Growing professionalization of RMFIs, supported by training programs organized by ARB, GHAMFIN and donor agencies, has resulted in a number of RMFIs with a qualified board, committed executive, and dedicated, adequately-trained staff. Where this is not the case, BOG has demonstrated its willingness to dissolve Boards and replace them with Interim Management Committees, and to replace Managers against whom serious allegations have been made with BOG staff as Supervising Managers. BOG has demonstrated some willingness to take direct action to deal with long-standing problems in the Rural Banks, especially in 1999 when it closed 23 RBs, after giving them some time to improve operations and raise additional capital, as well as to recover outstanding loans before closure. BOG provided resources to ensure that all depositors were paid (after an audit), and the impact was minimal, given that these banks had been moribund for some time. 35 Given that the NBFI system is relatively young, it has not yet intervened to close or take over management of NBFIs. Recently, however, it has begun fining S&Ls for delay in submission of prudential returns. Difficulties in Supervision Nevertheless, many RMFIs remain difficult and time-consuming to supervise because of: Lack of financial professionals such as accountants, bankers or economists on the Boards of RMFIs, leading to inappropriate decisions; Lack of understanding by Board members of the purpose and importance of management information; Tendencies of RBs to take actions that require Bank of Ghana authorization without prior consultation (e.g., opening agencies); Inadequate qualification, training or experience of some staff to handle their functions satisfactorily; High turnover of staff (especially those most qualified); Lack of staff understanding of required information, resulting in reports that are mechanically or poorly prepared and inadequate preparation for supervision teams; Entrenched leadership

Other difficulties encountered by BOG supervisors of RCBs and S&Ls (as well as CUA supervision teams) include: Reaching the widely dispersed RBs and coping with the large number of Agencies, often at a substantial distance from the head office, especially with limited availability of suitable vehicles;

34

In addition to the basic training that all supervisory staff receive, more specialized training is given according to the types of institutions for which particular staff members are primarily responsible. 35 The refund of deposits was a one-time arrangement; there is no deposit insurance scheme.

30

Inadequate communication facilities and technological support, including need to upgrade computers and increase the number of laptops; Lack of experience of some supervision teams with RMFIs.

IV.

Business and Contract Enforcement Environment

A. Registration of RMFIs Even NGOs and other organizations that engage in financial activities face a hurdle in having to register under the Companies Code, 1963 (Act 179) in order to have a legal corporate existence (a condition for licensing by BOG as a financial intermediary, which is required for savings mobilization and for NBFIs that borrow from the market and lend). The requirements of registration under the Companies Code are sufficiently complex that most community-based organizations, self- help groups, and traditional forms of finance in the susu system remain informal or semi- formal through registration as a cooperative or association (e.g., many Credit Unions). 36 This status does not preve nt them from operating, only from becoming licensed and from utilizing legal contract enforcement procedures. B. Regulation of Small Business Activity Incorporation as a limited liability company under the Companies Code and the legal requirements to be fulfilled after acquiring legal personality are, likewise beyond the reach of most microenterprise clients of RMFIs. Small, owner-operated businesses, however, have a legal existence and a simple means of registration under the Registration of Business Names Act, 1962 (Act 151). The Act requires registration by every individual having a place of business in Ghana who carries on a business name which does not consist of his true surname without any addition other than his true first names or the initials thereof.37 This creates a favorable environment for informal business activity operating as a sole proprietorship, in that operating a business in ones own name does not require any special registration and registration of a business name with the R egistrar-Generals Office is a relatively straightforward process. For people operating a business jointly, however, it is necessary at least to register under the Incorporated Private Partnerships Act, 1962 (Act 152; amended 1980, Act 425). The problems encountered by microenterprises in conducting their business generally have to do more with zoning ordinances by local authorities than with registration per se. Lack of legal title or secure rights to land in urban areas makes them vulnerable to the actions of municipal authorities, whether intended to make use of public lands on which microenterprises are operating, to enforce private property rights, or simply to beautify or reduce congestion in
36

The term informal does not imply outside the law, since people can legally operate business in their own name and often are registered by and pay taxes to local authorities. Susu collectors who are registered members of GCSCA, which itself is registered as an Association, might be considered semi-formal, in contrast to informal collectors who operate on their own without affiliation. 37 Similarly, a company is required only to register a business name which does not consist of its corporate name without any addition.

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cities by clearing kiosks and traders off the streets. Although harassment by municipal authorities is not generally a major problem throughout Ghana, it does occur periodically and constitutes a business risk to the many informal traders and business operators without access to a secure place of business. Uncertainties about the applicability and administration of tax laws to informal businesses are another source of potential harassment. In fact, those who carry out their businesses within organized markets do pay fees or taxes to the authorities operating those markets. Those operating outside market stalls are the most vulnerable no doubt the majority of the microenterprise sector. C. Financial Contracts38 The Mortgages Decree 1972 together with Land Title Registration Law 1986 (PNDCL 152), the Conveyance Decree 1973 (NRCD 175 and Contract Law 1960 (Act 25) govern the creation and enforcement of security interest on immovable property to secure loan contracts, but does not cover the creation and enforcement of security rights on movable property and collateral. The provisions of this law are difficult and costly to administer, especially in view of fundamental problems in verifying and establishing title to land and tracing transfers through the registry system. Transferring land ownership is cumbersome and slow. Modernizing the system and procedures for registering ownership and security interest in both immovable and movable property will be essential for the growth of rural lending and micro credit, as well as for the banking and capital markets. 39 Obtaining judgment to foreclose on property pledged as collateral is not too difficult; enforcement is the problem. The debtor can win considerable delay by applying for a stay of execution, and then appealing (it can take a year for the Appellate Court to hear the case). Because people are reluctant to lose their property, banks are likely to enter into the foreclosure process more to induce clients to make payment arrangements than in hopes of actually obtaining and selling the property. In small towns and rural areas, selling property can be extremely difficult, because of social pressures against purchasing land that has historically belonged to one family. On the other hand, informal moneylenders are able to utilize pledged land simply by farming it or renting it out and keeping the proceeds, until the debtor makes good, as long as the contract is recognized by local traditional authorities. Enforcement of movable property as collateral is not very well developed in Ghana. Banks are reluctant to take vehicles as collateral because it is difficult to monitor maintenance and liens are not well developed, so it is necessary to register under joint ownership for the bank to effectively prevent sale. For other movable property, a bill of sale used to be used as an instrument to give the bank rights over the property, but enforcement has proven difficult and banks are reluctant to deal with the problems of repossessing and selling such property.

38

Based in large part on information provided by Edmund Armah. See Annex 3, Schedule 3 for additional information. 39 Taken from J. Gallardo, back-to-office report notes for Gallardo 2002.

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In general, courts in Ghana have tended to sympathize with debtors, even when enforcing a contract on which they have defaulted. For example, they may be disposed to waive accumulated interest, even while requiring payment of principal. Since 2000, however, an attempt is being made to introduce fast-track courts for commercial cases that have the status of a High Court and can dispose of cases within a year. Initially, this has been staffed by Court of Appeal judges on a part time basis, dealing primarily with creditor-borrower disputes, contract performance, and sales of assets, and it has had some benefit in reducing the burden on the High Court. Personal guarantors have proven to be a relatively effective and enforceable form of security for loans in Ghana. MFIs tend to rely relatively heavily on personal guarantees, and banks often insist on guarantors who are in a strong financial position and clearly understand their obligations. Acceptable guarantors must have sufficient unencumbered cash assets (e.g., savings accounts, T -bills) to cover the amount of the loan. If the loan goes into default, the creditor must send a letter to the guarantor demanding payment and giving a deadline; then go to court to obtain judgment to seize the money. Some costs would be involved for the delivery of a writ of summons and the services of a bailiff. Although the defendant has only 8 days to appear and 14 to file, if the defendant is sufficiently evasive, the process can take some time. However, if the case is straightforward, the creditor can readily obtain a summary judgment, which is commonly done. The system is sufficiently effective that people have become more wary of signing as guarantors. Discounting of receivables has become more common in Ghana, with the advent of discount houses under the NBFI Act. A popular arrangement for import financing is to place the goods in a bonded warehouse and release them piecemeal to the client upon repayment for previous releases. Another variation is the inventory credit system described in Box 3.

V.

Assessment of Impact of Regulation on the Evolution of Microfinance

The introduction of licensing and regulation of RMFIs can have effects ranging from stifling to promotional, depending on their coverage, timing and restrictiveness. In Ethiopia, for example, the introduction of a single legal format for MFIs (apart from savings and credit cooperatives under non- financial jurisdiction) forced NGOs out of their direct microfinance activities, resulting in little flexibility in approaches to microfinance (Annex 1b). At the same time, it forced those agencies that wanted to continue doing microfinance to become more professional and commercial, establishing greater potential for long-run sustainability (which has nevertheless been constrained by insistence on low interest rates that are not commensurate with costs). In contrast, the advent of Ugandas Micro Deposit-taking Institutions Bill has stimulated its leading MFIs four of them established solely for microfinance, not as programs of sociallyoriented NGOs to accelerate introduction of upgrading and capacity-building measures and donor agencies to mobilize support for this process, raising standards for the industry as a whole without imposing legal or regulatory constraints on those RMFIs that do not wish to take and intermediate savings from the public (Annex 1a).

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Ghana has evolved different licensing and regulatory structures for different segments of the financial system, including rural and micro finance, and administered them in a flexible manner, with periodic revisio ns of regulatory standards and introduction of new legislation and with relatively high tolerance for traditional financial mechanisms and NGOs that are behaving in a responsible manner. While this approach has avoided overly restricting RMFIs that are not covered, BOG has adopted these measures more in response to emerging situations than through several years of systematic study of and consultation with the RMF industry, as in Uganda. In part for this reason, regulation and supervision have not been as systematic in Ghana as appears likely to be the case in Uganda, and regulations have occasionally been tightened to deal with the imbalance between numerous weak institutions and inadequate supervision capacity. A. Advantages and Drawbacks of Ghanas Approach Adaptive Regime Fosters a Range of Institutions The adaptive nature of Ghanas regulatory regime is indicated by the fact that each segment has evolved in a rather different way: Moneylenders Ordinance recognized an existing practice and gave it a legal basis; Rural Banks emerged from special rules applied under existing law; The NBFI Law stimulated creation of new types of financial institutions, as well as bringing some existing ones under the regulatory framework (enabling some to transform while others died out); Credit Unions developed under non-financial legislation; were unsuccessfully brought under the purview of BOG via the NBFI Law; and will eventually be catered for under special legislation adapted to their dual situation as both cooperatives and financial institutions.

Introduction of special rules for the establishment of local unit RBs and the initial role of BOG in capitalizing them represented an active governmental response to a perceived developmental need that was not being served adequately by existing financial institutions. Their poor performance, in turn, triggered a restrictive response in the form of high reserve requirements, which gradually helped a substantial number of them improve their financial position, but restricted their ability to achieve their mandate of increasing the availability of rural credit. The government has responded to that situation through a project to create a new Apex Bank to better serve, develop, and eventually supervise them. Despite weaknesses in financial performance and direct financing of agriculture, RBs today constitute the backbone for extension of financial services to rural areas. Introduction of the NBFI Law led development of this emerging market by facilitating the entry or formalization of a wider range of financial intermediaries, many serving the micro and small enterprise sector and low- income households. Nevertheless, frequent increases in the minimum capital requirement have caused some delays and disruption to the institutions involved. Initially, the law was designed with large formal institutions in mind. But the minimum capital requirements were modest enough (at least after some erosion by inflation) and application of the regulations (after an initial delay) sufficiently flexible to permit licensing of a variety of S&L models (NGO, small bank, moneylending operations).
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Ghanas process of encouraging entry and then adjusting regulation has fostered a wide range of RMFIs and products in formal, semi- formal and informal segments, including some suitable for microenterprises and lower- income households, with some reasonably strong linkages between segments. The strength of Ghanas system lies in a diversified structure of both institutions and regulatory regimes, well adapted to local economic circumstances. Nevertheless, the outreach of the system, particularly with respect to credit and to the rural poor, has been fairly limited. Most RMFIs serve only a local market, and no highperforming financial intermediaries with a significantly large national client base have emerged. It remains to be seen whether introduction of an Apex Bank can turn the rural banking system into a high-performing network capable of managing a growing loan portfolio with strong linkages to grassroots RMFIs, and whether significant scale and sustainability can be achieved through introduction of a new commercial microfinance venture or transformation of a leading NGO with a national presence. While a number of licensed institutions have successfully adapted traditional susu savings products and thereby extended outreach to poorer clients, it is not yet clear whether they can build successful loan portfolios on this base. Balancing Prudential Supervision Capacity and Barriers to Entry A recurring problem of Ghanas strategy of allowing easy entry into promising new types of financial intermediaries credit unions in the 1960s and 1970s; Rural Banks in the 1980s; and S&Ls in the 1990s has been a substantial number of weak institutions that pose a dilemma to regulators. Part of the dilemma involves cost: while fully effective on-site supervision of over 120 RBs is beyond the capacity of BOG staff, a disproportionate share of staff resources is absorbed in the effort. Part of the problem is developmental: when the relevant department sees itself in a promotional role, it is difficult to take firm actions to weed out weak institutions early. BOGs response has been to use regulatory requirements to offset the limits of prudential supervision. High reserve requirements served as a rather blunt instrument to help restore many RBs to financial health (discussed in the next section). The 2001 increase in minimum capital requirements went well beyond adjusting for currency depreciation and assuring adequate capital to a restrictive level that few of the existing licensed RCBs and S&Ls can hope to attain. Only 74% of RCBs and 63% of S&Ls have met even the 2000 requirement, which was then raised five- fold and fifteen- fold, respectively, in 2001. There has been considerable regulatory forbearance to allow existing institutions time to comply with minimum capital and prudential requirements, and S&Ls in particular have had difficulties in part because of their own weak internal controls and mana gement problems. Rather than addressing the core problems, however, the present situation threatens most existing S&Ls with closure because of the impossibility of achieving such a large increase in paid-up capital from local resources, not to mention a corresponding increase in loan portfolio. While one S&L is reportedly preparing to float shares on the Ghana Stock Exchange, in general the high entry barrier appears likely to exclude those without foreign partners. On the positive side, two S&Ls have brought in foreign investment and one NGO is poised to do so. The high minimum capital requirement is a particular restraint on Ghanaian-owned S&Ls, whose microfinance methodologies and relatively poor clientele tend to make them
35

relatively small and local. As deposit-taking NBFIs, S&Ls have to post the same minimum capital as discount houses, implying that they would be expected to book comparable risk assets. In reality, S&Ls assets average only an eighth of those of discount houses, and only double those of RBs, despite having 30 times as much required minimum capital (Table 5.1). Whereas efficient use of minimum capital of US$2 million would imply risk assets on the order of $18-20 million, S&Ls actual average risk assets are only US$1.3 million, implying that the present capital requirement is misaligned with the type of business that S&Ls actually do. Furthermore, mobilizing substantial additional capital would then raise pressure to raise loan portfolios tenfold to use those funds efficiently a risky rate of expansion for any financial institution. While the US$2 million minimum requirement may be suitable for large, national commercially-oriented microfinance operations such as Sikaman and Sinapi Aba Trust, consideration should be given to a lower requirement for small, local private MFIs that can efficiently serve a limited market niche. Otherwise, it risks driving underground those S&Ls that will be unable to comply and reversing the positive trends of both formalizing what were essentially mone ylending operations and enabling successful NGOs to move into mobilizing and intermediating savings as a basis for greater outreach.
Table 5.1: Assets of Depository Financial Institutions, 2001 ( million) Major Banks Discount S&L Rural Banks Houses 14,433,659 360,239 78,638 518,190 17 3 8 115 849,038 120,080 9,830 4,506

Total Number Average

With respect to transformation of NGOs into licensed MFIs, Ghanas system now more closely resembles Ugandas new Micro Deposit-taking Institutions Bill (currently before Parliament), which has a special category for large RMFIs that wish to mobilize and intermediate deposits. The minimum capital and prudential regulation requirements for Ugandas Tier 3 category are expected to limit entry to only two to four institutions in the first two years; but NGOs and other RMFIs that dont qualify can continue operations as unsupervised Tier 4 institutions, as long as they dont mobilize and intermediate savings from the public (i.e., nonmembers, for small member-based groups). High Interest Rates and Reserve Requirements Improve Soundness, Inhibit Outreach Throughout the 1990s, weak fiscal discipline (especially in election years), persistent double-digit inflation, and the use of monetary policies to restrain liquidity resulted in relatively high interest rates not only for commercial bank lending but also for T-bills and Bank of Ghana bills and bonds (above 30% for seven of the last nine years). The consequence has been very little incentive for banks to lend, since they can make a good return (over much lower deposit rates) simply by investing excess liquidity in T -bills. Although the high reserve requirements (62% primary and secondary) imposed on Rural Banks has sometimes been blamed for the small amount of credit they provide, in fact they have generally maintained more than the required amount of reserves (e.g., 28% in primary reserves in 1998 as against 10% required; and 64-65% in 2000-01 in secondary reserves as against 52% required).

36

The argument could be made that high reserve requirements together with high T -bill rates have been largely responsible for the improved financial performance of a substantial share of the RCBs, by preventing the poor loan portfolio performance that had previously plagued them. Nevertheless, this situation has also prevented them from making a substantial contribution to the availability of credit in rural areas part of the mandate for their establishment, along with savings mobilization. If the decline in inflation and T -bill rates in 2002 continues, incentives will improve to increase the loan portfolio. The conditions for lending by RCBs to expand in a sound manner, which are being established through the Rural Financial Services Project, include: Reduction of secondary reserve requirements, differentiated according to portfolio management performance, enabling well-performing RCBs to shift more available liquidity from T-bills into loans; Improved capacity in BOG (together with the ARB Apex Bank) to implement a supervision and ratings system that distinguishes more clearly between well-performing RCBs and less capable ones; Improved management capacity and information systems in the RCBs; Strengthening of linkages between RCBs and MFIs or CBOs that can provide sound microfinance methodologies and deeper outreach to the rural poor.

The step taken in 2002 to lower reserve requirements of RCBs according to their loan recovery performance appears to be a reasonable compromise between encouraging more active lending and maintaining performance incentives. It remains to be seen whether RCBs can effectively utilize the resources released, as well as the capacity-building assistance being provided, to increase credit in their communities without undermining the gains that have been made in their financial performance. Linkages between Tiers Ghanas flexible, multi- tiered system appears to have fostered a number of linkages between different segments, including: Licensed RCBs and S&Ls using informal agents, groups or CBOs to mobilize or to onlend funds; NGOs using RCBs and S&Ls to handle the funds for their microfinance programs; Susu collectors and clubs using commercial banks, RCBs and S&Ls to deposit funds.

New Products from Old As noted in the discussion of the susu system in Chapter II, licensed RCBs and S&Ls (as well as some commercial banks) have utilized the traditional susu methodology of daily or weekly deposit collection to raise their savings mobilization and to provide lower- income households with greater access to financial services. One benefit of conducting this business under licensed institutions is better coverage of the risks, both to clients (who can still recover their savings from the institution if an agent runs off with their funds) and to the institutions and its employees, in that theft of collections can be covered by the institutions insurance.

37

B. Conclusions The model that Ghana appears to be moving toward is a network of financially sound, licensed and supervised RMFIs that can reach sufficient scale for self- sustainability (even if only in a local market) and also serve as the backbone for greater penetration in rural areas and to the very poor through linkages to (unregulated) NGOs, CBOs and informal agents that target these clients. Ghanas Rural and Community Banks have an important role to play in this approach and distinguish it from most other African countries by providing a licensed banking institution located in rural areas that can provide both outreach through linkages with MFIs and CBOs and integration with the formal financial system through the Apex Bank. Nevertheless, building up this system entails substantial investment in the Apex Bank, in supervision and training, and in strengthening their capacity to make good use of the liquidity being released through lower reserve requirements and interest rates on T-bills. Transformation of NGOs into licensed RMFIs has been less of an issue in Ghana than other countries in part because they have been able to work synergistically with RCBs. Besides the Community Banks, the S&Ls have provided a useful urban counterpart to RBs, providing convenient transactions for urban commerce and households through adaptations of traditional susu and moneylending methodologies. Ghanas experience shows the value of opening up (or leaving alone) different tiers of formal, semi- formal and informal RMFIs that provide different products and services to different market niches. However, it is also clear that taking too promotional an approach and allowing too easy entry in the early stages tends to foster a number of weak institutions, especially when they are using relatively new methodologies that are relatively untested in the local market. This can both undermine the credibility of that category of institutions and drain scarce supervision resources or foster benign neglect until the problems become severe. Clearly, the biggest challenge in regulating RMFIs is finding the right balance between ease of entry for greater outreach, prudential regulations to promote sustainability, and supervision capacity. C. Recommendations for Ghana Policy Avoid government credit programs at subsidized interest rates, especially when passed through RMFIs, to avoid deterioration of repayment performance. Shift the Common Fund allocation and other poverty-focused government funding to direct grants to build up public goods such as infrastructure and skills in poor communities, to lay a foundation for income-generating activities and access to microfinance (rather than directed credit programs that tend to undermine sustainable RMFIs).

Regulations Pass the new draft legislation for Credit Unions to clarify the respective roles of the Department of Cooperatives, BOG, and CUA, particularly with respect to monitoring and supervision responsibilities.

38

Distinguish between large national S&Ls and small, local money-keeping/lending microfinance operations, with different minimum capital and other prudential requirements commensurate with their types of business and capacities. 40

Supervision Strengthen skills of supervisory staff, especially in knowledge of the methodologies of RMFIs. Enhance logistical support to permit increased on-site inspection. Require half- yearly reports on outreach from RCBs and S&Ls. Steadily tighten enforcement of reporting and prudential requirements, including application of sanctions for non-compliance with directives.

Capacity Building of RMFIs Focus on building up strong internal controls. Ensure that Board members are knowledgeable, through qualifications and through sensitization seminars on RMF best practices and prudential requirements. Establish a strong, sustainable system of training for staff (actual and prospective) of RMFIs.

Business Environment and Contract Enforcement Streamline and modernize business registration, especially for incorporation of RMFIs. Open commercial courts in the Regions and provide better (computerized) systems. Provide specialized training for judges in commercial transactions. Amend High Court rules to reduce the time between filing processes and hearings. Greater availability and use of arbitration to settle disputes and enforce rulings.

40

Capital adequacy requirements might appropriately be higher for the small, local MFIs in recognition of their limited institutional capacity, the volatility of their portfolio, and a lower minimum capital. Nevertheless, BOG will have to assess whether the benefits of maintaining this category as an avenue for moneylending-type operations to be formalized and regulated are sufficient to justify the costs of supervising them.

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Annex 1: Microfinance Legislation in Uganda and Ethiopia

1a: Micro Deposit-taking Institutions in Uganda
The push for a special regulatory niche for microfinance institutions in Uganda came in part from the leading microfinance NGOs, at least four of them specialized only in microfinance, which wanted to be able to take savings deposits legally as a basis for expansion. At the same time (late 1990s), the Bank of Uganda (BOU) became increasingly concerned about the risks to poor peoples savings in MFIs and village banks that were being promoted under donor programs, especially in the light of commercia l bank failures. Despite potential conflicts between the objectives of the practitioners and the central bank regulators, a consultative process over about four years yielded a Micro Deposit-taking Institutions Bill (passed in 2002) that establishes a new Tier 3 for MFIs that wish to take and intermediate deposits from the public to become licensed with a substantially lower minimum capital requirement (US$0.4 million) than for commercial banks (US$2.3 million). Other MFIs, including credit NGOs and small memberbased savings and credit associations, are left outside the supervisory responsibilities of BOU Ugandas microfinance industry includes a commercial bank, a licensed Tier 2 non-bank microfinance institution, about 90 national and internationa l NGOs operating specialized MFIs, at least 700 smaller multisectoral NGOs and community-based organizations (CBOs) engaged in microfinance, and several hundred cooperatives and member-based savings and credit organizations, as well as informal savings and credit groups and moneylenders. A number of donor and government programs are also active in the sector, ranging from capacity-building support to advising BOU to wholesaling funds to small MFIs. The consultative process was particularly effective in arriving at legislation satisfactory to all parties because of a good coordination mechanism. The Ministry of Finance, Planning and Economic Development chairs the Micro Finance Forum, which is open to all interested stakeholders from government, practitioners, donors, and the private sector, and which grew out of the committee that organized a 1998 Workshop on the National Policy and Strategic Framework for Micro and Rural Finance. This Forum and its subcommittees served as a sounding board for policy and legal drafts emanating from BOU, and also helped to educate BOU and Parliament on the nature, objectives and principles of microfinance. Besides meeting the minimum capital requirement, applicants for Tier 3 must meet sustainability, prudential and reporting requirements. This has motivated the leading MFIs to undertake measures to improve their systems (especially MIS), and helped galvanize donor support for capacity-building of these and other MFIs. At the same time, BOU has been preparing its staff and the regulations for implementation. Although establishment of a special regulatory niche for MFIs was some four years in the making, the process yielded a well-targeted framework designed to minimize the costs of application to both practitioners and regulators. Nevertheless, in passing the law, Parliamentarians required a followon bill for regulation of the Tier 4 NGO and CBO MFIs and assurance of affordable interest rates, intending to ensure services in their districts.

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1b: Ethiopias MFIs Expand under Limited Format

Ethiopias 1996 law on Licensing and Supervision of Micro-Financing Institutions shifted the basis of microfinance from humanitarian-oriented projects to a more commercial orientation as incorporated financial intermediaries. Despite the limited format permitted by the regulatory framework, Ethiopia has a relatively large number of licensed MFIs, with strong rural penetration and high operational efficiency, some reaching significant scale. Nevertheless, the system has some weaknesses in terms of supervision, compliance with regulatory norms, governance, and lack of flexibility. Prior to 1996, microfinance in Ethiopia (apart from traditional informal mechanisms) consisted primarily of projects by some 30 NGOs with mainly humanitarian objectives and was not based on sound, sustainable financial principles. Default rates were high, with little attempt at savings mobilization. The 1996 law established microfinance as a business activity restricted to wholly Ethiopian-owned companies, effectively sidelining the international NGOs. Savings and credit cooperatives are permitted, but they are not licensed or supervised as financial intermediaries. The initial four savings and credit institutions licensed under this law were supported in part by regional governments. The 17 additional MFIs that have since been licensed or applied have individual or local NGO shareholders, although financing may come in part from international NGOs. Although the law has clearly established mic rofinance as a commercial activity to be undertaken separately from humanitarian and other activities, governance and transparency issues arise from the absence of private capital and lack of direct representation of the agencies providing the actual financing. Performance of MFIs under this regime has been impressive, with two reacing some 200,000 clients each, a majority reaching at least 70% rural clients, savings mobilization of nearly 50% of loans outstanding, low delinquency rates (1% to 3% in four out of five MFIs with data available), and good operational efficiency. Yet costs are low in part because MIS systems and administrative controls are rudimentary. Few MFIs have complied with the requirement for external audit. Supervision has been limited: the central bank initially took a fairly laissez-faire stance, and it established a special microfinance unit only in 2001, which has not yet built up adequate capacity to supervise over 20 MFIs, several quite large. Thus, the scale and substantial savings mobilization (mainly institutional accounts) of MFIs imply some potential for difficulties, in the absence of strong external supervision and pressures to establish more effective monitoring, control and reporting systems. Nevertheless, MFIs that were adversely affected by the conflict with Eritrea managed to recover, largely on their own. Although Ethiopia was a leader in Africa in moving to treat MFIs as financial intermediaries, it has only gradually moved toward promoting financial self-suffic iency. The interest rate was initially fixed at 2% above the maximum rate for commercial banks. Although the ceiling was removed in 1998, most MFIs were slow to go above the previously mandated rate of 12.5%, reflecting both the influence of the regional g overnments and the view that the poor cannot afford higher rates. With a floor of 6% on savings, they found it difficult to cover the relatively high costs involved and had to depend on subsidies and concessional funding. By 2002, however, most MFIs were charging 18-24% (flat rate) and achieving high levels of operational self-sufficiency. While Ethiopian MFIs have kept costs low by international standards, this has come in part through complementary efforts of government agencies, especially to support the regional MFIs and implementation of the governments agricultural input credit scheme. All MFIs depend to some extent on a combination of government support and donor funding, although a few are moving toward full financial sustainability.

41

The minimum capital required for licensing is relatively low at 200,000 birr (about $24,000). MFIs are restricted to using group guarantee methodologies and to loans under one year and 5000 birr (under $600). While this has kept MFIs focused on the poor, it has prevented them from developing products better suited to individuals who may have graduated from group lending and to longer-term investments, for example in agricultural equipment. Given the time and expense required to put in place both effective supervision in the central bank and adequate MIS and reporting systems in the MFIs, the immediate priority appears to be on consolidating gains in terms of outreach and sustainability and building up supervision capability under the present, somewhat rigid model, rather than moving toward a more flexible, client-oriented approach with a greater variety of products and institutions.
Source: Amha 2000; Shiferaw and Amha 2001.

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Annex 2: Evolution of Legal Framework for RMFIs

Informal Agents
Moneylenders were the first form of microfinance to be officially licensed in Ghana, in the Moneylenders Ordinances of 1940 and 1957. Moneylenders have long been an important source of emergency and short-term finance (after relatives and friends) for the vast majority of the population lacking access to commercial financing, and the apparent motivation of the Ordinances was to register these agents both to give them a legal basis for recovery of debt and as a form of restraint on usurious practices. Moneylenders were required to register only with the local police, whom they often relied upon for enforcement of loan contracts, both informally and in court. Other forms of informal finance (savings collectors, traders, and savings and credit groups or clubs) have never come under regulation. The susu collectors Association has actually sought to be licensed, but the Bank of Ghana (BOG) has refrained both from attempting direct regulation of these numerous, small informal agents and from granting monopolistic licensing powers to their Association. The Association, instead, has attempted to improve the reputation of their members through self-regulatory measures (discussed below).

Credit Unions
The Credit Union movement in Africa was initiated by the Catholic Church in Northern Ghana in 1955, as a form of self-help for members. Historically, credit unions have been viewed more as social, cooperative groups than as financial entities, licensed under the Co-operative Societies Decree, 1968 (NLCD.252) and only nominally supervised by the Co-operative Council. Nevertheless, some element of regulation is implicit in the requirement that a credit union must first be established as a thrift Study Group and undergo tutelage under the Ghana Cooperative Credit Unions Association (CUA) before being considered to be in good standing in order to be officially registered with the Department of Cooperatives.41 The financial nature of credit unions was recognized by their inclusion in the 1993 NBFI Law. However, enforcement by the Bank of Ghana was not feasible due to the very poor financial condition of most of the credit unions operating at the time (Aryeetey 1996) and their inability to fulfill the requirements for incorporation as limited liability companies, as required by the Law. The ir resources had been depleted by the right to borrow up to double savings and very low interest rates and spreads, as well as by investments in non-financial community assets (e.g., tents to rent for funerals). The alternative approach adopted was to strengthen the capability of CUA as an apex organization, through a project (1995-2001) sponsored by the Canadian International Development Agency with the Canadian Cooperative Association as a technical partner. By 2001 CUA had achieved sustainability as a selfregulatory body providing services (including insurance) to members, and many member credit unions had reoriented themselves into commercial financial organizations. A new Credit Union Act has been drafted that would explicitly recognize the dual roles of the Department of Cooperatives (Ministry of Employment and Manpower Development) as the registering authority and BOG as the financial regulatory authority, and would spell out the supervisory functions
41

The Registrar of Cooperatives, which was the licensing agency at the time, was subsequently replaced by a Ministry, then a Department under the Ministry of Social Welfare. Some credit unions (many inactive) remain on the register of the Department, but are not members of CUA. CUAs criteria (as of 2001) include: (i) minimum membership of 100, with potential membership of not less than 600; (ii) three-month initial training period; (iii) each member must pay an entrance fee of not less than C5,000 (about US$0.70) and save not less than C10,000 per month in industrial CUs and C5,000 per month in community and Parish CUs; and (iv) accumulated savings of at least C5 million (US$700). Each licensed CU must transfer 25% of its annual declared profits to CUA, which it invests in Government securities in a Central Finance Facility; and it should not pay out more than 50% of annual profits without approval from CUA. Out of 191 CUs audited, 81% had complied with the 25% requirement .

43

that would be delegated to CUA. CUA will then report to Credit Union Supervisory Board proposed in the Act. The draft law is currently under review at BOG, which has been empowered by the new Bank of Ghana Act 2002 (Act 612) to delegate supervision by authorizing any person to exercise the power of the Bank to regulate and supervise non-bank financial institutions.

Rural and Community Banks (RCBs)

Although the Gold Coast Cooperative Bank was technically the first financial institution dedicated to agricultural finance, its operations were limited to the cocoa marketing business of the marketing cooperative societies that formed its membership. The first attempt at specialized banking for rural areas open to the general public was the Agricultural Credit and Cooperative Bank (later shortened to Agricultural Development Bank; Anin 2000). It was established in 1965 by Act 265 of Parliament as a development bank and subsequently (1971) expanded to permit all banking services (Kowubaa 2000). It remains owned by the Government of Ghana (64%) and the Bank of Ghana (36%). The Rural Banks were initiated in 1976 as a response to the limited penetration of ADB into rural areas and to better mobilize savings from local communities. RBs were licensed under the Banking Act of 1970 (Act 339), with special r ules by BOG permitting small unit banks to be established with a minimum capital of only US$43,000 (compared to US$650,000 required for commercial banks at the time), provided that the capital was raised from the local community, that the bank was to serve. Thus, simple adjustment of the regulations within the existing framework permitted the creation of Rural Banks without separate legislation. Until 1994, BOG provided the initial working capital of each rural bank in the form of preference shares. The rural banks were restrained from lending within the first 6 months of their establishment. Capacity-building of RBs has been promoted by the Association of Rural Banks (ARB) and supported by projects of the World Bank, DANIDA, and others. Restrictions on the operations of RBs have been tightened over time, as discussed in the next section. In 1987, the concept of a locally owned unit bank was exceptionally extended to an urban area with the issuing of a license to the La Community Bank in Accra after several years of efforts rejected on the grounds that the rule was intended only for rural areas. Since 1995 the name Community Bank was adopted for new rural banks which were commissioned. These Community Banks were subjected to higher entry standards, inc luding full capitalization by the shareholders and the expectation to maintain the requisite capital adequacy ratio. The intention at the time was to apply the term Community Bank also to existing rural banks that consistently maintained high performance and full compliance with prudential requirements. However, this two-tier structure to denote the achievement of minimum standards was abandoned in 1998 by BOG, which decided to address the problem systematically by upgrading the Rural and Community Bank (RCB) system as a whole . Only 6 out of 115 RCBs are presently called Community Banks. During the 1990s, many of the more progressive RCBs found their growth and services to members constrained by high reserve requirements (discussed below) and unsatisfactory services from correspondent commercial banks, on whom they depended for clearing checks, purchase of Treasury Bills (T-bills), specie movement, and other critical services. At the same time, BOG found the task of supervising some 130 RCBs spread throughout the country to be costly in terms of personnel, and the high reserve requirement to be an overly blunt, if necessary, instrument to deal with varying capabilities among RCBs to manage funds. The outcome was an agreement to establish an ARB Apex Bank (ARBAB) as a licensed banking institution under the Banking Law, owned exclusively by RCBs and restricted to servicing them. 42 Its establishment is being supported by the World Bank (International

42

Each RCB is to contribute 20 million (US$2,600) as share capital. RCBs that cannot take up their full shareholding (without bringn their capital adequacy ratio below 6%) have up to 10 years to complete the p urchase (with the capital shortfall being met by expenditures under the RFSP and converted to dollar-denominated loans to the RCBs concerned). The Apex Bank began

44

Development Association, IDA), International Fund for Agric ultural Development (IFAD), the African Development Bank (AfDB), and the German Agency for Technical Cooperation (GTZ) under the Rural Financial Services Program (RFSP, effective in 2001). The ARB Apex Bank was licensed in 2001 and will be admitted to the Bankers Clearing House when it starts operation in full. It will provide check clearing, treasury functions, specie movement, and other services for member RCBs, and eventually will be delegated supervisory functions by BOG.

Non-bank Financial Institut ions

Sustained recovery and growth of the Ghanaian economy in the late 1980s created growing demand for financing and financial products that could not readily be satisfied by the commercial, development, merchant and rural banks licensed under the Banking Law. Under the World Banks Financial Sector Adjustment Project, the Government sought to diversify and modernize the financial sector by introduction the Financial Institutions (Non-Banking) Law, 1993 (PNDCL 328), which established nine categories of f inancial institutions: discount companies, finance houses, acceptance houses, building societies, credit unions, mortgage finance companies, venture capital funding companies, leasing and hire purchase companies, and S&Ls. BOG set up a new Non-Bank Financial Institutions Department to process the licensing and supervise these institutions. Among them, the credit union and S&L categories offer micro savings and loan products that are most relevant to the lower-income population. 43 Prior to the NBFI Law, a number of the financial products that it covers existed under specific statutory instruments, but were not regulated by BOG as financial institutions. These include leasing and hire purchase, mortgages, and building societies.44 These have now clearly been brought under one law and under BOG supervision. Insurance companies are covered under the National Insurance Law 1989 (PNDCL.227) and a separate regulatory authority (National Insurance Commission), and they provide regular risk insurance schemes and other products, including contractual savings plans linked to specific payouts (i.e., for death, education, or other defined events). The NBFI Law brought under regulation a category of semi-formal financial institutions known as susu companies that had arisen in the late 1980s and were running into difficulties for lack of sound prudential behavior. These were registered businesses that hired agents to collect daily savings in the markets using standard susu collector methodology (described in more detail in Chapter III), except that they did not return savings monthly, but instead offered depositors guaranteed credit of a multiple of their deposits after a certain period (usually six months). These companies expanded rapidly in the 1980s, filling one of the critical gaps in financial services. However, imprudent management of funds by many companies led to frequent collapse and prompted the BOG to regulate their activities (Nissanke and Aryeetey, p.67). Under the NBFI law, such companies were required to become licensed Savings & Loans Companies; the first to do so was Womens World Banking Ghana, which had to delay the launch of its Mutual Assistance Susu (MASU) scheme in order to comply.

operations in July 2002, with 2.1 billion raised from 39 RCBs, half of the required 2.5 billion. In addition, RCBs are expected to deposit 5% of their total customers deposits with the Apex Bank, to facilitate check clearing.
43

Leasing companies also have the potential to serve small and medium -scale enterprises, although this potential has so far not been realized. One company, however, has recently established a Micro-lease Department in an attempt to serve this market (after several years of efforts to establish an independent subsidiary, which failed to get licensed in part because of repeated increases in the minimum capital requirement). 44 Finance Lease Law 1993 (PNDCL.331); Hire Purchase Decree 1974 (NRCD.292); Mortgages Decree 1972 (NRCD.96); Building Societies Ordinance 1955 (No.30, amended). Source: Addeah 2001.

45

Annex 3: Summary of Laws and Regulations for RMFIs and Businesses

Schedule 1. Legal and Regulatory Requirements for Different Types of MFIs - Ghana
Type of Institutions Requirements for Entry Organizational Required Format Minim. Capital Capital Adequacy Portfolio Quality Liquidity Reserves Area Restriction External Regulation Prudential Supervision

Country Ghana Rural Banks

Permitted Activities

Specialized Bank Limited Banking services, Limited liability Co. US$67,000 savings, deposits, loans Unit Bank equivalent

6% of risk asset

Savings & Loans NBFIs Company ARB Apex Bank Apex Fin. Inst.

Limited Banking services, Limited liability savings, deposits, loans Company Apex bank functions Limited liability Company

US$ 2 million equivalent US$133,000 equivalent

10%of risk asset 6% of risk asset Int'l(CCA WOCCU) standards Int'l(CCA WOCCU) standards Not Applicable

Provisioning 8% Primary 1% Current 20-30% Secondary 5-100% Delinquent 10% Primary ditto 15% Secondary ditto " " Int'l(CCA WOCCU) standards Int'l(CCA WOCCU) standards N/A Int'l(CCA WOCCU) standards Int'l(CCA WOCCU) standards N/A

Rural District

Co. Registrar; BSD Bank of Ghana Bank of Ghana

None

Co. Registrar; NBFID Bank of Ghana Bank of Ghana Co. Registrar; BSD Bank of Ghana Bank of Ghana

None

CUA

Apex Fin. Inst.

Wholesale loans/deposits, 2nd-tier members' Not Applicable central capital fund, Cooperative training assessment Association Deposits and loans to members only Cooperative Association Company limited by guarantee (not-for Not Applicable profit Trust) Cooperative Association Not Applicable Not Applicable

None

Dept. of Dept. of Cooperatives Cooperatives Bank of Ghana Bank of Ghana Dept. of Credic Union

Credit Unions

Credit Union

None

(Common Cooperatives Association bond) Bank of Ghana Bank of Ghana None Registerar of Companies Dept. of Coop. Bank of Ghana N/A None

NGO- MFIs

NGO

Micro-credit

National Ass'n of Cooperative Susu Collectors Society Individual Susu Collectors Informal

Deposits and loans to member collectors

Not Applicable

N/A

N/A

None

None

Collecting & safekeeping Informal individual Not Applicable of clients' savings Enterprise BSD - Banking Supervision Department NBFID - Non-Bank Financial Institutions Department

Not Applicable

N/A

N/A

N/A

N/A

46

Schedule 2. Classification of Regulations According to Objective Ghana

Primary Objective Credit Risk Main Regulation Minimum Capital Requirement Loan Provisioning Liquidity Risk Market Risk Liquidity Ratios Assets Diversification Reserve Requirements Exposure Limits Disclosures Specific Implementing Measures Capital Adequacy Adjustment to value of Loans Sector/Segment Intended to be Protected Financial Resource Management Portfolio Quality Solvency Solvency Portfolio Quality Very Effective High Compliance Assessment of Effectiveness of Regulation Low Compliance Fair Compliance

Schedule 3. Legal Systems and Judicial Processes

Legal
Country
Ghana

Regulation
of Business Activities
Business permits; business names registration; corporate registration; Licensing and prudential supervision

System / Tradition
English Common Law

Laws Covering Real and Personal Property Rights Accepted Registration Transfers Enforcement Negotiable Fixed Movable Assets Property System Recording Processes Instruments
Mortgage law Land Title Registration Law Central registry (manual) Manual system of recording and registry Courts Act Extra-judicial foreclosure not feasible Warehouse receipts

Central Credit Bureau

None

N/A

47

Annex 4: Reports to Be Submitted by S&Ls, RCBs, and Banks

S&Ls Weekly Liquidity Reserves Monthly Assets & Liabilities Credit Concentration Sectoral Distribution Quarterly Current Year Operating Results Capital Adequacy Regulated Exposures Portfolio Quality Maturity Profile of Asset & Liabilities Consolidated Balance Sheet Half Yearly Ownership & Management Insider Lending Capital Expenditure Closure & Opening of Branches Annually Statement of Accounts Rural/Community Banks x x x x x x x Major Banks

x x

X X X X X X X x x

x x x x

x x x x x x x

48

References
Addeah, Kwaku (2001). The Legal and Regulatory Framework of Micro and Rural Finance Institutions in Ghana, paper presented at the Rural Financial Services Project Launch Workshop, AgonaSwedru, Ghana, November 8, 2001. Addo, J. S., Consultants (1998). A Feasibility Study and Business Plan for the Establishment of an ARB Apex Bank, Accra: revised report for the Association of Rural Banks. Africa Region, The World Bank (1997). Technoserve/Ghana, Washington, D.C.: World Bank, Africa Region Studies in Rural and Micro Finance No. 2. Agyei, Samuel Asiedu (2001). Regulatory Framework of Rural Financial Institutions in Ghana, draft report for Ghana Micro-Finance Institutions Network, May 2001. Amha, Wolday (2000). Review of Microfinance Industry in Ethiopia: Regulatory Framework and Performance, Addis Ababa: Association of Ethiopian Microfinance Institutions, Occasional Paper No. 2. Anin, T. E. (2001). Banking in Ghana, Accra: Woeli Publishing Services. Aryeetey, Ernest (1996). The Formal Financial Sector in Ghana after the Reforms, London: Overseas Development Institute, Working Paper 86. ______________ (1994). A Study of Informal Finance in Ghana, London: Overseas Development Institute, Working Paper 78. Aseidu-Mante, E. (1998). Financial Markets in Ghana in Issues in Central Banking and Bank Distress, Lagos: WAIFEM. Bank of Ghana (2000). Non-Bank Financial Institutions Business (BOG) Rules Accra. Brobbey, Justice S. A. (2000). The Court and the Law on Interest Rates, Banking and Financial Law Journal of Ghana, Vol. 1, No. 6, pp. 56-64. Camara, Modibo Khane (1996). Microfinance Institutions in Ghana, Frankfurt: draft report for Internationale Projekt Consult and the World Bank. CHORD (2000). Inventory of Ghanaian Micro-Finance Best Practices. Accra: Report for Ministry of Finance, Non-Banking Financial Institutions Project. Crossley, Julian, and John Blandford (1975) The DCO Story, B arclays Bank International Ltd. London. Department of Cooperatives (2001) Annual Report 1999 2000, Accra. Fry, Richard (1976). Bankers in West Africa, London: Hutchinson Benham.

49

Gallardo, Joselito (2002). A Framework for Regulating Microfinance Institutions: The Experience in Ghana and the Philippines, Washington, D.C.: The World Bank, Policy Research Working Paper No. 2755. Gallardo, Joselito, Vijaysekar Kalavakonda, and Bikki Randhawa (2002). Developing Micro-Insurance Products: The Experience of Ghana and Bangladesh, Washington, D.C.: The World Bank, discussion draft. Ghana Cooperative Credit Union Association (CUA) Ltd. (2002). 12th CUA Biennial Report (January 2000 December 2001, Accra. Ghana Cooperative Susu Collectors Association (GCSCA) (2003). Delegation of Data Collection Activities by Ministry of Finance to Ghana Cooperative Susu Collectors Association, Accra: GCSCA, draft. Ghana Microfinance Institutions Network (GHAMFIN) (2003). Census of Micro Credit NGOs, Community-Based Organizations and Self Help Groups in Ghana, Accra, GHAMFIN, draft report prepared by Asamoah & Williams Consulting. __________________________________ (2001). On-Lending to Savings Collectors in Ghana, Washington, DC: World Bank, Africa Region Studies in Rural and Micro Finance No.12. Kowubaa Ltd. (2000). Rural Finance Review Study, Report prepared for Ministry of Finance/World Bank NBFI Project. Nissanke, Machiko, and Ernest Aryeetey (1998). Financial Integration and Development, London: Routledge Studies in Development Economics. Offei, C. (1965). Rural Credit in Ghana, Legon: University of Ghana, Masters thesis. Osei-Bonsu, E. (1998) The State of Rural Banks in Ghana, Paper prepared for the Association of Rural Bank Seminar Accra. Owusu Ansah, Mark (1999). Nsoatreman Rural Bank Ghana: Case Study of a Microfinance Scheme, Washington, DC: World Bank, Africa Region Studies in Rural and Micro Finance No.6. Quainoo, Aba Amissah (1997). A Strategy for Poverty Reduction through Micro-Finance: Experience, Capacities and Prospects, Accra: draft report of a study commissioned by Government of Ghana, UNDP, African Development Bank, World Bank, August 1997. __________________ (1999). Financial Services for Women Entrepreneurs in the Informal Sector of Ghana, World Bank, Africa Region Studies in Rural and Micro Finance No. 8. Republic of Ghana (1970). Report of Commission of Enquiry into Former Cooperative Societies, Accra. Robinson, Marguerite (2001). The Microfinance Revolution: Sustainable Finance for the Poor, Washington, D.C. World Bank. Shiferaw, Bekele, and Wolday Amha (2002), Revisiting the Regulatory and Supervision Framework of the Micro-Finance Industry in Ethiopia, Norway: Drylands Coordination Group, Report No. 13.

50

Steel, William F., and Ernest Aryeetey, Savings Collectors and Financial Intermediation in Ghana, Savings and Development, Vol. 19 (1995). Van Greuning, Hennie, Joselito Gallardo and Bikki Randhawa (1999). A Framework for Regulating Microfinance Institu tions, Policy Research Working Paper No. 2061, World Bank: Washington, DC.

51

Series #
ARWPS 1

Africa Region Working Paper Series Title Date

Progress in Public Expenditure Management in Africa: Evidence from World Bank Surveys Toward Inclusive and Sustainable Development in the Democratic Republic of the Congo Business Taxation in a Low-Revenue Economy: A Study on Uganda in Comparison with Neighboring Countries Pensions and Social Security in Sub-Saharan Africa: Issues and Options Forest Taxes, Government Revenues and the Sustainable Exploitation of Tropical Forests The Cost of Doing Business: Firms Experience with Corruption in Uganda On the Recent Trade Performance of Sub-Saharan African Countries: Cause for Hope or More of the Same January 1999

Author
C. Kostopoulos

ARWPS 2 ARWPS 3

March 1999 June 1999

Markus Kostner Ritva Reinikka Duanjie Chen Luca Barbone Luis-A. Sanchez B. Luca Barbone Juan Zalduendo Jacob Svensson Francis Ng and Alexander J. Yeats Miria Pigato Channing Arndt Jeffrey D. Lewis C. G. Tsangarides William J. Smith Iain T. Christie D. E. Crompton Louis Goreux Jeffrey D. Lewis Miria Pigato Fahrettin Yagci Peter L. Watson Robert Fishbein 52

ARWPS 4 ARWPS 5 ARWPS 6 ARWPS 7 ARWPS 8 ARWPS 9 ARWPS 10 ARWPS 11 ARWPS 12 ARWPS 13 ARWPS 14 ARWPS 15 ARWPS 16 ARWPS 17 ARWPS 18

October 1999 January 2000 June 2000 August 2000

Foreign Direct Investment in Africa: Old Tales and New November 2000 Evidence The Macro Implications of HIV/AIDS in South Africa: A Preliminary Assessment Revisiting Growth and Convergence: Is Africa Catching Up? Spending on Safety Nets for the Poor: How Much, for How Many? The Case of Malawi Tourism in Africa Conflict Diamonds Reform and Opportunity: The Changing Role and Patterns of Trade in South Africa and SADC The Foreign Direct Investment Environment in Africa Choice of Exchange Rate Regimes for Developing Countries Export Processing Zones: Has Africa Missed the Boat? Not yet! Rural Infrastructure in Africa: Policy Directions November 2000 December 2000 January 2001 February 2001 February 2001 March 2001 March 2001 April 2001 May 2001 June 2001

Series #
ARWPS 19

Africa Region Working Paper Series Title Date

Changes in Poverty in Madagascar: 1993-1999 July 2001

Author
Stefano Paternostro J. Razafindravonona David Stifel Miria Pigato Navin Girishankar A. Alemayehu Yusuf Ahmad Luc Christiaensen Harold Alderman Beth Verhey David L. Bevan Guenter Heidenhof H. Grandvoinnet Daryoush Kianpour Bobak Rezaian Francis Ng Alexander Yeats Jeffrey D. Lewis Sherman Robinson Karen Thierfelder P. Le Houerou Robert Taliercio Samer Al-Samarrai Hassan Zaman Serge Michailof Markus Kostner Xavier Devictor Xiao Ye S. Canagaraja

ARWPS 20 ARWPS 21

Information and Communication Technology, Poverty, and Development in sub-Saharan Africa and South Asia Handling Hierarchy in Decentralized Settings: Governance Underpinnings of School Performance in Tikur Inchini, West Shewa Zone, Oromia Region Child Malnutrition in Ethiopia: Can Maternal Knowledge Augment The Role of Income? Child Soldiers: Preventing,Demobilizing and Reintegrating The Budget and Medium-Term Expenditure Framework in Uganda Design and Implementation of Financial Management Systems: An African Perspective

August 2001 September 2001

ARWPS 22 ARWPS 23 ARWPS 24 ARWPS 25

October 2001 November 2001 December 2001 January 2002

ARWPS 26 ARWPS 27

What Can Africa Expect From Its Traditional Exports? Free Trade Agreements and the SADC Economies

February 2002 February 2002

ARWPS 28 ARWPS 29 ARWPS 30

Medium Term Expenditure Frameworks: From Concept to Practice. Preliminary Lessons from Africa The Changing Distribution of Public Education Expenditure in Malawi Post-Conflict Recovery in Africa: An Agenda for the Africa Region Efficiency of Public Expenditure Distribution and Beyond: A report on Ghanas 2000 Public Expenditure Tracking Survey in the Sectors of Primary Health and Education Promoting Growth and Employment in South Africa Addressing Gender Issues in Demobilization and Reintegration Programs

February 2002 February 2002 April 2002

ARWPS 31

May 2002

ARWPS 32 ARWPS 33

June 2002 August 2002

Jeffrey D.Lewis N. de Watteville

53

Series #
ARWPS 34

Africa Region Working Paper Series Title Date

Putting Welfare on the Map in Madagascar August 2002

Author
Johan A. Mistiaen Berk Soler T. Razafimanantena J. Razafindravonona Gerald Foley Paul Kerkhof Djibrilla Madougou Brian D. Levy Stephen Golub Ahmadou Aly Mbaye S. Devarajan Delfin S. Go Hinh T. Dinh Abebe Adugna Bernard Myers Stephen N. Ndegwa Professor A. Mbaye John Baffes Abayomi Alawode Steven Jaffee Ron Kopicki Patrick Labaste Iain Christie Hippolyte Fofack C. Obidegwu Robert Ngong Elizabeth Crompton Iain T. Christie Louis Goreux John Macrae Channing Arndt 54

ARWPS 35

A Review of the Rural Firewood Market Strategy in West Africa Patterns of Governance in Africa Obstacles and Opportunities for Senegals International Competitiveness: Case Studies of the Peanut Oil, Fishing and Textile Industries A Macroeconomic Framework for Poverty Reduction Strategy Papers : With an Application to Zambia The Impact of Cash Budgets on Poverty Reduction in Zambia: A Case Study of the Conflict between Well Intentioned Macroeconomic Policy and Service Delivery to the Poor Decentralization in Africa: A Stocktaking Survey An Industry Level Analysis of Manufacturing Productivity in Senegal Tanzanias Cotton Sector: Constraints and Challenges in a Global Environment Analyzing Financial and Private Sector Linkages in Africa Modernizing Africas Agro-Food System: Analytical Framework and Implications for Operations

August 2002

ARWPS 36 ARWPS 37

September 2002 September 2002

ARWPS 38 ARWPS 39

October 2002 November 2002

ARWPS 40 ARWPS 41 ARWPS 42 ARWPS 43 ARWPS 44

November 2002 December 2002 December 2002 January 2003 February 2003

ARWPS 45

Public Expenditure Performance in Rwanda

March 2003

ARWPS 46

Senegal Tourism Sector Study

March 2003

ARWPS 47 ARWPS 48

Reforming the Cotton Sector in SSA HIV/AIDS, Human Capital, and Economic Growth Prospects for Mozambique

March 2003 April 2003

Series #
ARWPS 49

Africa Region Working Paper Series Title Date

Review of Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry April 2003

Author
William F. Steel David O. Andah

55