The Bank of Ghana (BoG) has signalled that it will increase the minimum capital requirement for microfinance companies, after it revoked the licences of more than 70 percent of them.
The BoG, in a press release last Friday, notified the public of closure of 347 microfinance companies across the country – citing various reasons which include undercapitalization; corporate governance breaches; non-compliance; poor lending and investment practices leading to inordinate losses; and diversion of customer deposits into private businesses among others.
It is against this background that the BoG says it is considering increasing the minimum capital requirement for the industry, which currently stands at GH¢2 million, as part of measures to prevent this situation from repeating itself in future.
“The Bank of Ghana is undertaking a comprehensive review of licencing and supervisory policies and directives; reviewing the minimum capital requirements for microfinance companies; and encouraging possible consolidation through voluntary mergers and acquisitions,” the press release stated.
Commenting on the regulator’s intention to increase the minimum capital requirement, economics professor at the University of Ghana, Prof. Peter Quartey, said it is long overdue as its delay has led to the springing up of many microfinance companies which do not have the capacity to compete in the industry.
“I think it is something that is long overdue because the MFIs are also means of banking, and banking is serious business; you need some liquidity to cushion yourself. You should have some money to fall on quickly so that people don’t lose confidence in your operations. But where you have a very thin capital-base, then it becomes a problem.
“So, I think the industry should have a decent minimum capital to operate. When that happens, this mushrooming of microfinances will reduce so that those who really have the capital to do this business will remain in it,” he told the B&FT in an interview.
The total number of companies which have had their licences revoked comprises 155 insolvent institutions that have already ceased operations, and 192 other insolvent ones. In addition, the licences of 39 microcredit companies (also known as money-lenders) have been revoked, comprising 10 of such companies that are insolvent and have ceased operations, as well as 29 other insolvent ones. This leaves the industry with just a third (137) of its previous total number of 484 companies.
The BoG says it will further introduce proportional corporate governance; fit and proper, and risk management directives; embark on strict supervision of licenced institutions and enforce relevant regulatory requirements; and increase the resources available for effective supervision of licenced microfinance companies.
This, Prof. Quartey said, is the right time for such an action to be taken, saying it will restore lost confidence -despite it having some repercussions on the economy and livelihoods of the people.
“It is the right time for this to happen. There is an interconnectivity between the MFIs and the banking sector, so you can’t reform only the banking sector and leave the other. Initially, it will bring some pain in the form of lost jobs and frustrations in retrieving deposits – and thereby creating inconvenience to customers; but in the long run it will restore some confidence in the system,” he said.