Banking

Microfinance companies should merge to survive

The Microfinance Companies in Ghana are going through a lot of challenges, and for that reason there is a need for concrete measures to be put in place to restore some stability in the market.  It is a market that if properly harnessed will go a long way in forcing the commercial banks to be more creative and innovative with bringing out products and services that bring about extensive financial inclusion.

Most of the commercial banks are concentrated in the capital cities, and it is the microfinance companies that are serving the financial needs of a large number of rural folk in the country – even at the level of district capitals. In fact, they are equally called ‘banks’ in most of the areas where they operate in Ghana.

Unfortunately, the challenges they face in day to day running of their businesses are numerous and are causing them to fold-up on a daily basis. One of their major concerns is the cost of funds, which is excessively high and gravely affecting their operations. Also, the impacts of loan defaults on their survival are high and mostly due to their capital base. Other challenges including high cost of operations and poor structures are all threatening their continued existence.

The Bank of Ghana is thus under pressure to come out with drastic measures to restore confidence in the market, and a cursory study of the market today indicates that the BoG has indeed intensified the monitoring of these companies. However, a drastic increase in the capital requirements for microfinance is much needed to bring about mergers to improve the sector. Also, the numerous challenges they are faced with in today’s economy of Ghana further lend credence to the need for consolidation in the microfinance sector through mergers and acquisitions.

For example, the central bank of Nigeria (CBN) embarked on similar reforms in the banking sector of Nigeria between 2004 and 2008. This was as a result of weak capital base, insider deals, weak corporate governance, over-dependence on public deposits, insolvency and so on, according to Donwa and Odia (2005).  Their banking sector was highly oligopolistic with over 89 banks.

The CBN then undertook consolidation of the sector through a drastic increase from N2 billion to N25 billion as the minimum capital requirement to operate as a bank in Nigeria, and this has reduced the number of banks in Nigeria to 22.  The liquidity of the banks improved to assume risk, brought some stability in their market, increased their efficiency and reliability — and it is believed that the massive globalisation of Nigerian banks in recent times result from the consolidation.

It is in the same vein that we should be proactive as a people and begin to see the signs, so that proper measures are put in place to restore stability. Mergers and Acquisitions in the microfinance sector are crucial and needed to bring about efficiency for these companies. It will help bring their cost of operations down through, for instance, sharing resources such as head offices, branches and others.

It will further reduce competition among them, which will also help to bring their cost of funds down — and for that matter, the interest rate they charge on their loans. Furthermore, mergers will also help improve the liquidity of these companies to also assume more risk and further help in extending the reach of their products and locations to other parts of the country.  This will thus result in increased revenue, and the potential of tax gains for these companies is also high.

Furthermore, the vision of most of these microfinance companies is to become Savings and Loans Companies and later grow to become banks. Mergers will thus pave the way for realisation of this goal in the shortest possible time, with all its benefits for their growth.

In all, the current turmoil in the sector should serve as signal to these companies to begin the process of talking at some level on merger propositions. It is about time they begin to look for their suitable partners, because their survival in this competitive market hinges on increasing their capital base and cost reduction — and one of the shortest routes to achieving this is through mergers. The present ‘I want to do it alone’ syndrome in Ghana cannot continue.

These small numerous microfinance companies that are springing up on a daily basis do not augur well for the market, and it is about time Ghanaians learnt to pool resources and build giant companies for the future generation.  We should chart a new course of partnership and resources-sharing to bring about the development we are looking for as a country.  We cannot continue with the current trend of one-man-enterprises if we want to go global, and the stock exchange market should be strengthened to play its role.

 In conclusion, despite various pressures on the Bank of Ghana to sanitise the microfinance sector and restore some level of confidence, it has to carefully implement such measures to ensure that these microfinance companies are better positioned to play their strategic role in the economy.

 

Author: Fred Atsiku

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