Microfinance firms, 3 others contributed 14.3% of loans in first-half of 2020 – BoG

Second Deputy Governor of the Bank of Ghana (BoG), Mrs Elsie Addo Awadzi

Specialised Deposit-Taking Institutions (SDIs) in the banking industry provided 14.28% of total loans in the first half of 2020, Second Deputy Governor of the Bank of Ghana (BoG), Mrs Elsie Addo Awadzi, has disclosed.

SDIs comprise of Savings and Loans Companies, Finance Houses, Microfinance Companies, together with Rural and Community Banks licensed by the BoG to provide loans to segments of the society that would typically not be able to access financial services from commercial banks.

SDIs are expected to accept small deposits and to provide small loans to micro, small businesses and informal sector business operators as low as GHC 1000 with a cap beyond GHC 20,000.

The loans dispersed by the firms this year despite the COVID-19 pandemic amount to about GHC 5.7 billion as of July 2020.

At a media sensitization programme on Tuesday, October 13, which was organised by the Ghana Association of Savings and Loans companies, Association of Finance Houses, and the Ghana Association of Micro Finance Companies, Mrs Awadzi, noted at the end of July 2020, “the assets of SDIs constituted 8.47 per cent of total banking sector assets, and their deposit base and loans made up 7.70 per cent and 14.28 per cent respectively of the entire banking sector”.

She identified the sector as “the bedrock of our economy and can be harnessed and nurtured to become strong economic actors”.

In her view, without SDIs, there will be a big vacuum in the financial system.

Savings and Loans Companies, Finance House Companies, and Microfinance Companies, currently operate through a total of 1,070 branches nationwide serving about 1.5 million individuals and businesses.

Their clients include salaried workers, transportation and communications, agriculture, forestry and fishing, and small-scale construction, mining and manufacturing.

The BoG had to clean up that sector after sanitising the commercial banks which resulted in nine institutions losing their operational licence.

The apex bank revoked the licences of 347 insolvent microfinance companies and 39 microcredit companies on May 32, 2019. Additionally, the BoG revoked the licences of 15 insolvent Savings and Loan Companies and 8 insolvent Finance House Companies.

“It is important to note that 155 of these Microfinance Companies and 10 of the Micro Credit Companies had already ceased operations and had been dormant for a number of years,” Mrs Awadzi noted.

She said several of them had operated for a number of years without regulation, and upon being licensed, continued with business as usual, without compliance with licensing requirements and other regulatory norms, and without understanding that as financial institutions, they had to operate under prudent management and strong internal controls to ensure the safety of their depositors’ funds.

The pointed out that a number of Savings and Loans Companies and Finance Houses strayed away from their mandates under the licences issued by the BoG, and tried to operate as banks without the requisite amounts of capital or the expertise to manage the risks they were taking.

Instead of taking small deposits and lending small amounts of money per customer, they took on large deposits and made large loans, and placed significant amount of funds with other SDIs and related parties with little or no prospects of getting back these funds.

“Essentially, it is these factors, namely, poor capitalization, poor business models, poor governance and risk management, and in some cases fraud and dishonesty, that led to many of these institutions collapsing in the last few years starting with the famous or infamous DKM in 2016, and subsequently many more,” she bemoaned.

The government intervened to mitigate further loses for depositors.

Out of GHC 6.5 billion deposit claims validated by the receiver of the failed SDIs, an amount of GHC 6.39 billion has been issued to be given in cash to depositors, leaving a balance of Ghc110 million being claims of related parties.

Following the cleanup of the SDI sector, there are currently 25 Savings and Loans Companies, 15 Finance Houses/Leasing Companies, 137 Micro Finance companies, and 144 Rural and Community Banks, currently operating.

In order to mitigate the risk of reoccurrence of mass failures in the SDI sector, the BoG has revamped its supervision of the sector and is working on new rules on corporate governance and risk management to guide operators in the sector.

The operationalization of the Ghana Deposit Protection Scheme in October 2019 will also help to protect small depositors of SDIs in the event that they fail, she added.

The central bank expects the SDI sector to be the key delivery channel for financial inclusion, a key requirement for Ghana’s socio-economic advancement.

There are still many Ghanaians and businesses that do not have access to savings products and credit facilities, and this presents opportunities for the SDI sector to grow.

Under the National Financial Sector Development and Inclusion Strategy (2018-2023), the government expects an increase in access to finance from the current rate of 58 per cent of the adult population to 85 per cent by 2023.

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