For several years, the private sector has had cause to complain incessantly about sky-high lending rates in the banking sector, blaming the latter for the perennially low investment in non-current assets, which is critical for developing market competitiveness. In the microfinance sector, lending rates are even worse, so much so that it pales in comparison to the oppressive usury witnessed during medieval Europe, for which reason Pope Clement V had to issue a ban in AD 1311. In today’s microfinance environment, it won’t be far-fetched to find a provider charging between 10-12% interest rate on loans per month. Heck, you might even find 15% per month. If this does not tickle your moral sensibilities,s then perhaps a concrete example might jolt your conscience. Let’s say Aunty YaaYaa, who sells tomatoes at Agbogbloshie, borrows GH¢4000 for 3 months at an interest rate of 12%, and recycles the borrowing four times within the year, she effectively pays GH5,760 in interest expense, alone, an amount that is 44% greater than the loan principal. Those that defend the status quo resort to oft cited refrain such as high borrowing cost, high operating cost, etc., etc., as though discretionary choices regarding business model design is a given. Some critics have argued, albeit facetiously, that modern microfinance as currently practiced in Ghana is nothing but economic and organized crime masquerading as financial inclusion. They quip, jokingly, that “if this is what is called financial inclusion, then may we all be excluded”. Without doubt, policymakers have on their hands a classic case of market failure. The charge that microfinance, as currently practiced, constitutes ‘mission-drift’ is a fair accusation – guilty as charged, collectively. Several questions then arise:
- What kind of microfinance ecosystem do we want as a country? What policy outcomes should any sector reforms accomplish? In summary, what should change look like?
- What possible risks could derail such a reform program, from a design or implementation standpoint?
- What specific initiatives, if any, could mitigate the risks to program implementation?
Full policy brief available upon request.