The year 2013 witnessed unprecedented collapses of micro-finance businesses in the country. The sad thing about this phenomenon is that, some of these companies were licensed by the regulator; Bank of Ghana. Having worked in the industry for close to 3years, I observed that the causal factors of this phenomenon are wide and varied. However, the main contributing factor has been identified as inadequate knowledge of the industry by operators and owners of these companies.
Most of the owners, normally the Chief Executive Officer, CEOs took the business as a trade where people moved on to establish their own after a few months of training. Owners did not pay attention to the analysis and consequences of the decisions they were taking. These business owners would not listen to the advice from young finance professionals they had employed. The young professionals also had no option but to allow owners to have their way in order to keep their jobs.
In most of these companies, that suffered this problem, owners and management(in some cases) refused to listen to advice from professionals they met at Ghana Association of Micro finance Companies, GAMC and Bank of Ghana, BOG meetings and refused to partake in several trainings that were organised for them. To some of these CEOs, the GAMC executives (who also have companies) were jealous of the fact that some of them had so many branches and were so popular. A lot of monies were spent on advertisement and other marketing strategies (though Bank of Ghana had warned them against advertisement).
Also, because there were so many of these companies springing up everywhere, the Ghanaian market was experiencing what the financial authority call financial saturation. Therefore, to keep up with the pressure of competition, companies rolled-out products that will endear more clients to them.
Unfortunately, some of these products were too costly to the companies; their income streams could not cover some of the expenses they were incurring in the form of interest paid to clients. The most popular of these products were the cement and cloth investment. The products were ran like fixed deposit products where clients deposited Gh¢100.00 (in most of the companies) and took 1/2 piece of cloth or 1 bag of cement whose prices were hovering around Gh¢20.00 for a period of 4-6 months (depending on the competition around)
Interestingly, instead of investing these monies to at least break even on the interest rate offered to their clients, they rather saw these timed investments as free/idle monies and applied them wrongly. In most cases, these were the funds that were used in opening branches and making other huge capital expenses (expensive rents, flashy furniture and decorations). Unknown to them, opening branches meant more expenses on utility, salaries and other overhead expenses.
The major source of income for micro-finance companies has been loans. Unfortunately, this department that required critical analysis was not given the needed attention. The popular method of asking clients to contribute for a month or 2 so that their balances could be doubled or tripled downplayed the significance of proper assessment and monitoring of loans. Loan Officer to client ratio widened for most companies hence did not have enough time to look at loans that were defaulting until the loans hit the expiry region (by then it becomes extremely difficult to recover). Clients identified this loop hole and played these companies by robbing Peter to pay Paul.
Another major cause of their downfall was fraudulent activities by staff of the companies. These acts were mapped out and executed easily because of weak internal controls, bad accounting software and poor supervision. Staff either created ghost accounts to take loans or recorded fake expenses. There were also peculiar cases where some of the software the companies were using allowed users to delete transactions. Some smart staff managed to delete withdrawal transactions so that their account balance will increase again to allow for more withdrawals.
Oblivious to these companies, all these activities were gradually leaking the funds they had accumulated.
Instead of finding a lasting solution to their liquidity challenges, they rather opened new branches to bring fresh cash or roll-out products with very high interest to the public, worsening the situation. Apart from the factors mentioned above, the government’s economic policies from 2012, has not been favourable to businesses in Ghana. For instance, when the Treasury bill rate was raised so high for so long, the public rather opted to invest in these safe securities than to invest in businesses and expose themselves to all manner of risks. Even when they took them to banks they were expecting high returns which the micro-finance companies could not pay, but had to accept because of the liquidity challenges they were going through. This consequently reduced the liquidity in the Ghanaian market and this meant that companies which thrived on deposits (micro-finance companies especially) started experiencing a gradual dip in deposits.
Unfortunately, this was coupled with a raise in utility prices and fuel prices which meant that operational cost for all businesses were going to increase.
In conclusion it would not be a bias to say that, most of these companies shot themselves in the foot by the poor manner in which they managed their companies. Though there may be some turbulence in the economy, I believe if these companies had structured their companies well, they would have received some support just like some of them with good structures had when they were going down. The government on the other hand is also entreated to come up with policies that will favour businesses in the country.
Patrick Owusu-Nuamah, MBA-KNUST
EMAIL: [email protected]