The Bank of Ghana (BoG) has begun a manhunt for directors of 10 microfinance companies who are operating illegally in the Brong Ahafo, Western, Northern, Upper East and Upper West regions.
The central bank has consequently moved to shut down the unlicensed finance companies for breach of the financial regulations.
The 10 blacklisted microfinance institutions are Care For Humanity International, Buoyant Investment Limited; God is Love Fun Club, Perfect Business Fun Club, Perfect Edge Group, L.P.M Eye Adom Fun Club, Creative Fun Club, Little Drops Helping Hand Association, Financial Giants Fun Club and Great Winners Fun Club.
The Head of Other Financial Institutions Supervision Department of the Bank of Ghana, Mr Raymond Amanfu, told the Graphic Business in Accra that the proliferation of unlicensed institutions and fun clubs, which promise unsustainable rates of between 30 and 55 per cent every two months (averaging over 330 per cent per annum), was worrying.
Multimillion dollar industry
There are currently 518 microfinance institutions with a total assets of GH¢1.3 billion as at June this year accounting for about 1.7 per cent of the total assets of the banking industry.
Loans and advances accounted for 45.5 per cent or GH¢587 million, which is deployed to various sectors of the economy, while 7.7 per cent or GH¢99.3 million is invested in government securities.
As at June this year, the MFIs had mobilised GH¢946.9 million in deposits, which formed 73.4 per cent of total assets of the MFIs industry.
But Mr Amanfu said such institutions collapsed in no time, creating the impression that the Bank of Ghana had placed moratoriums on their operations when they had not.
Ponzi schemes
He explained that some of these were “Ponzi schemes”, where the operators used higher interest rates to mobilise more deposits to pay their depositors.
“Although interest rates are not regulated, the Bank of Ghana would not allow MFIs to pay or charge unsustainable interest. We shall act promptly to deal with such situations,” he stated and adding that any rate above 32 per cent per annum is a bit on the high side “and they will have to prove to the BoG how they get the money to pay such rates.”
He maintained that the base rates of government securities, which were risk free and paid interest rates of about 25 per cent per annum; the rates promised by these companies, even if covering the risks associated with them, were not sustainable, especially over two-month periods.
Checks by the Graphic Business indicate that the central bank is collaborating with the Financial Intelligence Centre and Security Agencies to track down, arrest and prosecute directors, shareholders and management of unlicensed institutions, and may also include media houses that advertise these illegal institutions for abetment of crime.
“Henceforth, the Bank of Ghana shall close any illegal institutions reported to be taking deposits, with the support of security agencies.”
“The general public is cautioned not to transact any business with them, as they do so at their own risk,” he said.
Industry challenges
Other challenges facing the industry include poor loan recovery, resulting from the granting of credit to customers without proper credit appraisals, security and in amounts higher than prudential limits in a quest to increase income or profits.
That, he said, had affected liquidity due to high non-performing loans. Some MFIs had also embarked on branch expansion without adequate capital, thus putting customers’ deposits at risks, while some have voluntarily closed and/or are facing serious liquidity challenges.
Moreover, weak corporate governance structures and inexperienced management have resulted in weak management oversight, with its attendant mismanagement and fraud. Some shareholders, directors and management of some MFIs continue to engage in insider lending and exposing themselves to third party transactions contrary to provisions of the banking act, with such related exposures usually not repaid and interest understated.
Mr Amanfu said the dank would set up help desks at each of its regional offices across the country to quickly address issues relating to the microfinance institutions, especially unlicensed ones.
“With this modest growth levels, MFIs have a role to play in bringing banking to the doorsteps of our populace and promote financial inclusion. I, therefore, urge you, the media, to also highlight the good work of the industry,” he stated.
