The Ghanaian financial market boasts of more than 662 institutions providing microfinance services. These financial institutions are segmented into savings and loans companies, rural and community banks, microfinance institutions, money lenders, non-governmental financial institutions as well as credit unions. In many ways, it would appear that the Ghanaian market is well served. However, despite the number and variety of institutions providing financial services, the demand for credit in rural areas continues to be high. Alongside this, as the market has professionalised, the amount of regulation has also increased. In this article we seek to examine some of these reasons behind this and explain how having a good system in place can bring quick benefits.
In the last decade, financial services in rural Ghana have shifted from informal susu collections or borrowing from family members to saving and borrowing from MFIs. This has had some positive effects, improving the quality and availability of financial services available in the market. Paramount among the activities that microfinance institutions perform is the mobilization of savings from the informal sector in rural Ghana. This in turn helps them to provide affordable financing for business investments. By saving with an MFI, deposits previously held by susu collectors can now flow back into the financial system, providing commensurate returns on investment vehicles of choice. This is good thing. Alongside this, access to financial services for the informal sector and rural Ghana is linked to the achievement of social intervention goals on poverty alleviation, improved education and many more as savings rise. These are some of the benefits that the formalization of the informal sector has brought.
However in the wake of the liquidity crunch, over-indebtedness, and pyramid schemes that hit the market in 2012 and 2013, microfinance institutions have rightly been subjected to increased regulation as the BoG seeks to ensure more professionalism and ethical conduct in microfinance operations. Responding to these regulations is one of the main challenges faced by MFIs in Ghana today. One example of such a regulation is the increase of the minimum capital requirement for deposit taking microfinance institutions by the Bank of Ghana from a GHS 100,000 in 2011 to GHS 2 million in 2015. The BoG has cited branch expansion engaged in by some microfinance companies as increasing operational fixed costs as well as credit risks leading to increased risk on depositors’ monies. Many MFIs are struggling to comply.
The increase in regulations will surely lead to a corresponding increase in professionalism, ethical conduct and sustainable growth in the microfinance sector. But it will also come with some costs for the MFIs. Among which is supervision to ensure that institutions are operating by the prescribed guidelines, training to facilitate understanding of the guidelines and encouragement from the BoG for institutions with common goals and cultural inclination to merge and achieve capital efficiencies and economies of scale. In many ways this is part of the natural maturing of the market, and something that will result in more stable and professional financial institutions.
One thing that is clear is that to be a professional financial institution in Ghana, you absolutely need to have a robust core banking system that makes it easy to comply with regulatory requirements. Efficient systems are crucial in steering financial institutions towards growth and sustainability. A good core banking system enables an organisation to structure its data to enhance business analysis, and communicate results of the business through scheduled reporting. The essence of structured data provides stakeholders with the ability to observe the trends in key performance indicators juxtaposing those with business cycles, seasonality and market conditions to properly shape business growth.
So what should MFIs look for when picking a system? Some observable features of efficient systems include excellent system support, strong system security, continuous uptime and the system ability for the system to be accessible from different locations. Factors such as how the system ensures data integrity and integration with personal digital assistants, mobile money and other platforms together with the ease of enhancing reconciliation are also important functionalities to consider. Efficient information systems communicate with users given the in-built logic and intelligence. The logic may either minimize fraudulent activities like making no activity accounts automatically inactive after a period or pop-up a message when a client in write-off list is depositing money. Ultimately, the information systems used by microfinance institutions play a major role in the professionalism within the microfinance environment.
Stakeholders, regulators and the general public are interested in how microfinance institutions manage their financial resources. As a result, financials are tested for liquidity stress, solvency, sustained profitability and market share growth at regular intervals. Management of microfinance institutions should also monitor these at regular intervals to check whether they are on track with future goals. Business information analysis helps management to understand the changing behaviour patterns in the marketplace, guiding decisions as varied as branch expansion or new product introductions. These decisions need to be considered in line with regulatory constraints including liquidity & capital adequacy requirements, and future funding needs.
In Ghana, Innovative Microfinance has adopted Musoni as its core banking solution and is already seeing the cost benefits of adopting a cloud based system. Musoni is a cost effective financial solution with no need for significant investments in servers, network infrastructure, data protection and security; given it is a cloud-based system with information security provided by Amazon Web Services. With its SMS module, where reminder and promotional messages can be automatically sent straight to clients, Musoni stands out among many core banking systems with its ability to serve both internal and external needs. As an open platform, it is straightforward for organisations to integrate Musoni with their own point-of-sale terminals, automated teller machines, credit scoring systems and telecommunication service providers for purposes of mobile money. Musoni also boasts of a robust financial accounting module that can at any time provide users with financial accounts for analysis and submission to regulators.
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