Opinion: DKM madness and the business of microfinance
Date published: Tuesday, 15th March 2016
These are heady times with great advancement in many facets of businesses. Many nascent start-ups have sprung up with the hope of becoming widely successful one day. Microfinance is of the sectors that have received such unprecedented strides. It is interesting to know that in Ghana three out of every five streets is likely to have a microfinance institution.
There is something very kink about the surge and that is about the names they carry. The names are suggestive and portray that an attractive name would lure customers and so one could see such as “Save your life Savings and Loans”, “Quick Action Savings and Loans” “ Get rich Micro finance” and ambitious students are shunning courses in social sciences for banking and finances.
On January 5, 2016, Bank Ghana announced it has revoked licenses of 70 microfinance institutions. This sparked lot of discussions especially where in the Brong Ahafo Region of Ghana, a microfinance company by name DKM has ran into a ditch.
On daily basis many DKM customers picketed at its headquarters in a bid to force managers if at nothing at all withdraw their principal investments. As an on-going discussion, this article tries to examine the skeletal anatomy of Microfinance or “miracle banks” as they were called in the 80s in Ghana.
Two decades ago, it was rare luxury to open a bank account predominantly with the Universal banks. Most of banks had very stringent and prohibitive procedures and in most cases, one would have to bring a third party as referee with water and electricity bills. All of these created a huge rift between household and the banks.
In a keynote address delivered by Dr. H. A Kofi Wampah, governor, Bank of Ghana at the fourteenth annual working luncheon of the Ghana association of bankers on July 16, 2014, the governor revealed that “At end of May 2014, the banking and non-bank financial institutions industry was made up of 1,051 institutions comprising 27 class 1 banks, 57 non-bank financial Institutions (NBFIs), 139 rural/community banks, 435 licensed microfinance institutions, 388 forex bureaux, 3 credit reference bureaux and 2 representative offices of foreign banks.
The total number of bank branches as at end of May 2014 was 892 and the average population per branch, 28,027.8.
Despite such vast expansion of banking network and the multiplicity of intermediaries, bank penetration remains relatively low. In terms of geographical spread, banking operations are urban-based and highly concentrated in the southern part of the country with unbanked population ratio of over 80 percent.” So, the question is, where do the surplus incomes of the unbanked 80% go? The answers are obvious as it could be traced to some polythene bags hidden in a hole somewhere at the backyard, mattresses and roof ceilings.
The mechanics of Microfinance is simple. People living in poverty often have little tangible assets to use as collaterals against loans. Driven by the promise of sustainable poverty alleviation, most of these Microfinance institutions have enjoyed a lot of patronage, goodwill because it requires less paperwork and most of them have lined up brigades of young men and ladies who move door-to-door in savings mobilization mostly from the informal sector.
As a result, the businesses of Microfinance has flourished; enjoying high repayment rates, expanding their lending to a growing pool of customers and delivering strong returns. However, as they have gained the market share, a darker side of Microfinance has emerged, and the case of DKM and many amorphous ones whose stories have not been told will live with us for years to come. According to available information, this is skeletal anatomy of DKM's brouhaha.
DKM microfinance operates under the umbrella of DKM GROUP. The group diversified in areas such as Microfinance, Transport, Insurance, Cashew & Shea butter etc. Initially, they performed professionally just like any other entity.
Anybody who is well vexed in agribusiness would easily know that there is more money in cashew, than cocoa once you have a ready market. DKM as a group needed money to quickly expand and rake in profits in these areas. As a result, the revenue mobilization arm of the group (DKM microfinance) has had to raise funds to support this dream. By so doing, they had to increase their interest on savings to a super cutthroat level of 40 -50 percent. This got the people horny nut crazy as most of them being rural farmers and petty traders, any means by which one could double his/her money without having to break a sweat is “halelluya”.
However, the managers got overly ambitious, focused too much on these areas aforementioned and did not manage their account very well therefore, caught up in the difficult position where they run out of liquidity. In banking, every customer who walks into a bank must be able to get his or her money.
When a customer goes to a bank and does not get his/her money, that could mean the last straw that would break the camel’s back and that was exactly what happened to DKM microfinance.
Again, generally too, these Microfinance institutions, as could be seen from the myriad of attractive names they bear, their primary objective of poverty alleviation and job creation have given way to a “hot-ass- capitalist” way of doing things. These have led to progressive results ensuring more loans are provided to the poorest Ghanaian household efficiently.
These have resulted to exploitative practices, ignoring coercive repayment tactics. It is very interesting to know that most of these Microfinance institutions sometimes decline to disclose their interest rates or sometimes exaggerate them. Largely unconstrained by regulation, and as a result of a sheer passion, driven by commercial focus, most of them have augmented their lending at a frightening rate leading to multiple borrowing and soaring household debts.
What many people would be worried about is that all of these happen under the nose of the Bank of Ghana. In recent times, there have been reported cases of debt related suicides mainly attributed to their embarrassing and coercive tactics. Now that there is so much unrest and criticism about the sector in the wake of DKM’s insolvency, many stakeholders have begun to intervene.
Some have proposed putting waivers on loans for which twice the principal had been paid, limiting the ways in which Microfinance companies could collect their repayments and implementing rigid registration system for the sector even as hundreds and thousands of Ghanaians have already been affected and the industry’s clean image tarnished.
To date, the largest criticisms of Microfinance business have been directed at their super cutthroat interest rate, economic profiteering tactics and the unregistered and all of these affect the socially minded ones too. At the height of these crises, it is imperative that the ongoing reforms and regulations make it favorable for the Microfinance institutions to lend at reasonable interest rates and monitored. It will also as matter of an advantage and safeguard, a consumer grievance process be made more operational and effective.
Essentially, to purge the sinking image of the sector, it is also imperative to establish a specialized credit bureau to which all MFIs would be required to report their entire portfolio of lending.
This would help coordinate lending, control credit risk, preventing multiple borrowing, over-borrowing and consequent portfolio deterioration.
All of these are good starting points. Rigid quality control must be implemented with parallel auditing procedures. While at it, these rules should be harmonized across regions, and the Bank of Ghana must never be complacent with its current regulations regime, There is too much is at stake.
The contribution of the sector to national development is one too many. It simply cannot be over emphasized. How far the pace of development has reached is partly and largely the roles played by this sector. The sector has come to stay. It's worth all it takes at fixing. The future depends on it too.
The writer holds BA Economics, CIB ,(Ghana).