The enactment Non-bank Financial Institution Act, 2008, Act 774 into law, was an auspicious period in Ghana’s economic history, which was characterized by a medley of policy packages leaning towards an expansionary tilt. The Act, providing a clear framework for prudential supervision and market discipline, proved insufficient years later, as it served as a minimum threshold for regulating an increasingly complex sector. As a result, Bank of Ghana, following extensive stakeholder engagements, disaggregated the MFI sector into four tiers with Finance Houses, Rural and Community Banks, and Savings and Loans companies taking the slot for Tier 1 classification (see Figure 1). Institutions with the name extension “Microfinance Companies”, Credit Unions, and deposit-taking FNGOs occupy Tier 2, while non-deposit-taking FNGOs and micro-credit companies are classified as Tier 3. Tier 4 is reserved for individual micro-credit and Susu operators. The sheer complexity and nuance as one crosses from one tier to another clearly warranted the Bank of Ghana’s satellite agency regulatory approach, whereby prudential reporting and monitoring are outsourced to sub-sector association bodies. To further decentralize the regulatory approach, a rules-based model that was responsive to the specific nuances of each sub-sector was introduced to help standardize activities. As acknowledged by the regulator, the model adopted in designing the Business Rules and Sanctions for MFIs was “to ensure a gradual introduction of prudential, financial and risk management standards into the operations of the MFIs” (Business Rules, 2017). In proffering a rationale, the introductory text to the Rules further stated that the new regulatory approach was being cautiously undertaken “…so as not to unnecessarily stifle the operations and development of MFIs…” Suffice to say, two overarching principles were at play in shaping the regulatory framework that governs the MFI sector today: gradualism and proportionality. In 2011, the Bank of Ghana released Public Notice No. BG/GOV/SEC/2011/04 to outdoor and cement a new era of prudential regulation. Hopes were high, even as academics and researchers praised the policy, precipitating a torrent of development capital that later poured in to ‘save the poor’. After almost a decade and 347 license revocations later, fresh questions about the philosophical underpinnings of Ghana’s MFIs regulatory model seem justified. Obviously, the facts seem to bear out the argument that the gradualist approach has not yielded the much vaunted robust risk management and corporate governance systems that were expected. Fair to say the jury is still out on the Proportionality principle as well, it seems. The question then is: Has the principle of proportionality worked in realizing the stated policy outcomes? This analytical inquiry is even more urgent considering the devastating impact that COVID-19 has wrought. If the 23.4% of Ghana’s population who are considered ‘poor’ (see GLSS 7) are to participate in an economic rebound after COVID-19, then access to microfinance services, particularly micro-credit, is key. As of December 31, 2019, micro-credit, with its 663+ members scattered all over Ghana, represents the largest MFI sub-sector group that has the reach to drive the productive inclusion agenda. Credit Unions, FNGOs, and other market participants are also important actors in this space. Unfortunately, it may be hard to argue that the majority of actors within the MFI space have the balance sheet resilience to drive growth at the bottom of the pyramid.
Summary of Arguments
In this article, the following key arguments have been put forth:
- The outlook for economic rebound post-COVID-19 is dependent on a robust non-bank financial sector led by MFIs, particularly supply-side actors serving the bottom of the pyramid. But the resilience of the latter’s balance sheets is doubtful as the sector has yet to fully rebound from the recent reforms.
- The principle of proportionality, which has shaped regulatory response to issues in the MFI sector, has not had a demonstrable positive impact on corporate governance and risk management in the sector.
- Regulatory inconsistencies have added to the already complex dynamics in the MFI sector, particularly in tiers with a non-deposit-taking license.
- There is a need for harmonisation and realignment of policy approaches with consensus in the corporate governance literature.
Key Recommendations
- Allow Tier 4 operators to register as limited liability concerns, or at least partnerships. This will free up the capital structure to accommodate contributed or partner equity. It may also create incentives for greater accountability at the firm level as investors and/or partners seek to protect their assets.
- The monitoring and evaluation function within sub-sector associations must incorporate a decentralised structure that is organised around zonal-based compliance teams. Zones should have reporting lines to the head of monitoring and evaluation at the secretariat.
- Engage the Institute of Chartered Accountants (Ghana) to fashion out annual audit projects for non-deposit-taking operators at concessional fees, to be charged as part of the annual licensing fee.
- Enforce Rule 31 (Management Information System) as part of the licensing requirement for new entrants to the sector.