Question

The Bank of Ghana on 16th August 2019 completed the clean-up of the banking, specialized deposit-taking (SDI), and non-bank financial institutions (NBFI) sectors which it had began in August, 2017. This exercise culminated in the revocation of the licenses of 347 microfinance companies in the country. Evaluate five (5) factors that are believed to be responsible for the collapse of microfinance institutions in Ghana in recent years.

Answer 1

The following are the internal factors related to the operation strategies and managerial problems of the MFIs that contributed to their collapse in Ghana in recent years;

1. Indiscriminate branching : Unbridled opening of branches by MFIs led to high operational cost and it triggered the collapse. Opening of more branches increased the cost of utility, salaries for employees and overhead expenses also. There was a MFI which survived only for eight months but opened four branches.
2. Unsustainable returns to customers : There were many MFIs in competition for a given market share. Then the customers of these MFIs compare and share their experiences with one another. Then the customers of one MFI find that other MFIs were giving high interest. So they moved their accounts from the current MFI to another. More than that some of these products of MFIs were too costly to the companies to cover the expenses in the form of interest payable to the customers. The customers lost faith on FIs and they closed their accounts with them.
3. Disregard of due diligence : Process of due diligence which was time consuming disturbed the clients. And without delayed due diligent procedures people could easily access loans from competitors. Another cause was the MFIs methods of recruiting clients. Clients were asked to contribute for a month or two for them to double or triple their balances for them as loans. Because of such large number of customers, it could not look at loans that were defaulting. They were busy in serving incoming clients
4. Mismanagement : Effective risk management is essential to achieve institutional self-sustainability in the micro finance sector. The problems of reckless expenditure, poor risk management have been noted in micro finance companies.
5. Violation of Bank of Ghana rules and guidelines : MFIs are under a uniform regulatory framework. The guidelines are based on procedures for establishing a MFI, opening new branches, loan disbursement and deposit taking. Violation of these rules triggered collapse of MFIs. Among the rules violation, uncontrolled branches opening were the major problem.

Apart fro these internal factors, the external reasons were Macroeconomic instability and ‘Collapse rumors' leading to panic withdrawals.