Question

The Bank of Ghana has scheduled a forum to discuss the current state of microfinance institutions (MFIs) in the country. You are expected to submit a paper at the forum focusing on two broad areas, namely financial needs of the poor in the Ghanaian society and risk management practices of MFIs.

a) Explain four (4) factors that affect financial services needs of the poor in Ghana.


b) Discuss five (5) types of risk that MFIs face in their operations.

Answer 1

4 factors that affect the financial needs of the poor in Ghana:-

1. Interest Rates= Interest rate charged by the financial institutions is a major factor affecting the financial needs of poor peoples of Ghana. Most of the bank in the area charge higher rate of interest for providing funds which are beyond the capacity of these marginalized group of Ghana.

2. Higher collateral security= The institutions generally demand a higher amount of collateral security before providing any financial aid. A large section of population in the Ghana region is extremely poor and is not able to meet the standards of these institutions.

3. Transaction costs= Cost charged by the financial institution is another major factor that influences the financial service needs of the poor. If the amount charged for operating an account and doing transactions is quite high, then they would prefer for economical means.

4. Saving level= The saving customs of populations is also the deriving forces for the demand of financial services. Therefore, if they are in the habit of securing more and more amount, then they will demand more for financial services.

5 types of risks of that MFIs face in their operation:-

1. Credit Risk= This risk mainly encompasses risk arises out of non-payment of interest amount and loan obligations by borrowers. MFIs grants funds to marginalized groups of society without collecting any collateral security. This poses a great risk of default clients and enhances the chances of bad debts.

2. Liquidity Risk= Liquidity risk is basically the inability of MFIs to meet their obligations timely. These institutions generally face liquidity crunch and are unable to fulfill their day to day cash requirements. It adversely affects the interests of stakeholders of MFIs as it fails to fulfill their requirements. These risks are faced by these institutions due to inefficient management of funds and lack of proper planning for usage of cash.

3. Market Risk= Market risk are those risk which occurs due to changing market interest rate and adversely affects the earning capacity of these institutions. Sometimes, due to the change in values of assets and liabilities, these institutions are required to pay more interest rate on the amount collected by them as deposits from their customers than what they are actually charging from their debtors. These price fluctuations sometimes lead to huge financial losses to these businesses.

4. Operational Risk= These risks arises due to error or faults in the operational activities of these institutions. Lack of inadequate technology, outdated systems, well-trained manpower, and internal fraud can all contribute to a large amount of unexpected losses for MFIs.

5. Environmental Risk= Another major risk for this type of institution is from numerous competitors in their environment. Various other financial institutions grants loans to people on the lower interest rate as compared to MFIs. Also changing policies of the government, foreign exchange rate, and inflation rates poses a threat to the operations of MFIs.