Microfinance is becoming an increasingly popular way to provide financial services to low-income populations and micro-enterprises in Ghana.
Microfinance institutions (MFIs) provide basic banking services like loans, savings, money transfer and insurance to unbanked and underserved segments.
The microfinance sector in Ghana has seen steady growth over the last decade. According to the Bank of Ghana, there are 568 licensed microfinance companies, with total assets of over 4 billion Ghanaian cedi.
Most clients are low-income entrepreneurs in the informal sector, including farmers, food vendors, artisans, and petty traders. Women make up around 60% of microfinance customers in Ghana.
Some key factors driving the growth of microfinance in Ghana include:
- Financial inclusion – Large unbanked population representing potential market for MFIs.
- Supportive government policies – Establishment of microfinance guidelines by Bank of Ghana.
- Access to capital – Funding from donors, impact investors and microfinance investment vehicles.
- Mobile money – Digital channels like mobile money enable remote delivery of microfinance services.
The microfinance sector still faces challenges around lack of capacity, high operating costs, and clients lacking collateral.
However, overall, the microfinance industry in Ghana provides major socio-economic benefits and has strong long-term growth potential.
Key Takeaways
- Conduct extensive market research to identify target customers and demand for microfinance services.
- Obtain formal licensing from the Bank of Ghana by meeting regulatory standards.
- Develop appropriate financial products tailored to needs of low-income households and micro-enterprises.
- Build operational capabilities around credit assessment, loan tracking, collections and recovery.
- Implement integrated MIS, cash management and accounting systems.
- Maintain high standards of governance, risk management and consumer protection.
- Submit regular reports to the regulator and comply with guidelines.
How to Set Up Micro Finance Company in Ghana
Market research and determining demand
Before setting up a microfinance company in Ghana, it is important to conduct thorough market research to determine if there is adequate demand and identify the right target market. Here are some tips for microfinance market research in Ghana:
Analyze national statistics and studies
- Review reports by development agencies like the UN, World Bank as well as research papers to understand the overall microfinance landscape.
- Look for data on number of microfinance clients, loans outstanding, average loan sizes, repayment rates, etc to gauge market penetration.
- Also analyze demographic and socio-economic indicators relevant to microfinance e.g. financial inclusion rates, income levels, rates of self-employment.
Conduct market visits and on-ground research
- Visit towns and villages where you intend to operate to observe economic activity and potential microfinance clients directly.
- Interview micro-entrepreneurs in the informal sector to understand their financial needs.
- Assess if there is choice of microfinance providers or unmet demand.
- Gauge interest in products like micro-loans, micro-savings and micro-insurance.
Analyze competition
- Identify major MFIs operating in your target locations.
- Study their product offerings, pricing, processes and segments served.
- This will help you find gaps in competitor product suites you can fill.
- Talk to their clients to find out satisfaction levels and areas of improvement.
Consumer surveys
- Design surveys for microfinance clients and potential clients in your target market.
- Get insights into income levels, economic activities, financial needs, ability to repay, preferences etc.
- Analyze results to identify customer groups and products to focus on.
Pilot test
- Consider starting off with a small pilot program in a few locations.
- Test customer response to products and services on a smaller scale first.
- Fine tune processes, credit policies and technologies based on initial feedback.
Thorough market research is key to developing the right strategies and product mix. It provides data to identify the market segments to target, set growth priorities and project operational metrics like cost of operations, loan sizes and repayment rates.
Legal and regulatory requirements
Microfinance companies in Ghana need to comply with relevant legal and regulatory requirements. Here are some key aspects to consider:
Incorporation
- Microfinance companies can be registered as limited liability companies, credit unions or cooperative societies.
- Legal forms like Non-Bank Financial Institution (NBFI) and Financial Non-Governmental Organization (FNGO) are also options.
- Meet minimum capital requirements which range from GH₵ 300,000 to 500,000 for new entities.
Licensing
- Must obtain an operating license from the Bank of Ghana as a NBFI before commencing operations.
- License must be renewed annually for which financial and operational reports must be submitted.
- Meet standards around minimum capital, governance, risk management, KYC/AML, consumer protection etc.
Regulations
- Abide by Bank of Ghana’s guidelines on microfinance such as Directive on Microfinance Deposit Taking, Corporate Governance Directive, Consumer Protection Directives etc.
- Interest rates chargeable to clients capped based on formula set by BoG.
- Adhere to KYC, anti-money laundering and financial reporting obligations.
- Maintain minimum capital adequacy ratio, liquidity ratio, and standards on non-performing loans set by the regulator.
Lending requirements
- Set policies on client due diligence, credit assessment, loan approval procedures, collateral valuation etc.
- Establish credit risk monitoring processes and loan collections.
- Adhere to caps on loan sizes for microfinance borrowers.
Customer protection
- Treat customers fairly and ethically, especially for vulnerable segments like low-income women.
- Provide transparent disclosures on pricing, terms and penalties.
- Implement reasonable collections practices and grievance redressal mechanisms.
Taxation
- Register for taxes and comply with regulations around VAT, corporate income tax, employee taxes, etc.
- Withholding tax may apply for interest income earned by non-resident investors above exempted limits.
Engaging legal counsel can help navigate the licensing process and ensure ongoing compliance. Adhering to regulations is key to establish credibility and public trust as an ethical microfinance provider.
Business registration and licensing
The key steps involved in formally registering and licensing a new microfinance company in Ghana are:
Name search and reservation
- Conduct a name availability search at the Registrar General’s Department for the preferred business name.
- Reserve the name by completing a Name Reservation Form if available.
Prepare registration documents
- Submit the standard company registration forms i.e. Company Constitution, Notice of Situation of Registered Office, Particulars of Directors and Secretary etc.
- Have the relevant forms signed by directors and secretary before a Commissioner of Oaths.
- Get required attachments like copy of valid ID cards, residential permits for foreign directors, certificate of incorporation if parent company is registered.
Apply for license
- Submit application for a microfinance license to the Bank of Ghana with prescribed fees.
- Provide documents laid out in BoG’s licensing guidelines like business plan, financial projections, management details, sources of capital etc.
- The licensing process can take around six months after submission of complete application.
Register business
- After obtaining in-principle approval from BoG, complete company registration with the Registrar General’s Department.
- Pay registration fees which can range from around GHS 230 to GHS 450 based on company type and share capital.
- Obtain certificate of incorporation and certificate to commence business.
Post registration
- Register with Ghana Revenue Authority for taxes – VAT, corporate income tax, employee taxes etc.
- Open a business bank account and deposit minimum capital required by BoG.
- Apply for additional local government permits for signage, construction etc. if required.
Obtain license
- After completing registration and meeting all requirements, the Bank of Ghana will issue a final license to operate as a microfinance company.
- The license needs to be renewed every year by submitting annual returns and financial statements.
Ongoing compliance
- Maintain compliance with Bank of Ghana regulations and directives on an ongoing basis.
- Submit periodic financial reports as required by license.
- Adhere to minimum capital, liquidity ratio, and other prudential requirements.
- Implement strong governance, risk management and internal controls.
Proper planning, preparation, using lawyers, and closely coordinating with BoG can help streamline the licensing process and start operations on a compliant footing.
Read also: How to Register a Loan Company in Ghana
Developing products and services
An important part of setting up a microfinance operation is designing appropriate financial products for the target market. Here are some tips:
Conduct market research
- Gather insights from focus groups and surveys to understand needs of microenterprises and low-income households.
- Identify the kinds of loans, savings products, insurance etc. in demand.
- Assess ability and willingness to pay interest rates and fees.
Offer a mix of products
- Provide both credit and savings products to cater to borrowing and asset-building needs of clients.
- Consider adding micro-insurance, pensions, and payment services.
Loans
- Offer small ticket collateral-free loans for income generating activities, agriculture, education, emergencies etc.
- Amounts can range from GH₵100-5000 based on client profiles.
- Provide short to medium term loans of 3 months to 2 years to suit cash flow cycles.
Structure loan terms
- Offer flat and reducing balance interest calculation methods with monthly/weekly repayments.
- Have clear repayment schedule with standard penalties for missed payments.
- Set appropriate interest rates in line with regulatory caps (27-33% p.a).
- Offer grace periods for seasonal loans like agriculture.
Savings
- Introduce basic savings accounts with low minimum balance requirements.
- Offer options for recurring deposits, fixed deposits and collateralized savings.
- Provide channels for deposits via branches, mobile agents, mobile money etc.
Micro-insurance
- Allow low premium insurance for health, life, disability, property etc. tailored to low incomes.
Delivery channels
- Use branch network in communities for relationship-based lending to start.
- Introduce mobile money platforms for loan disbursals and repayments.
- Deploy field agents for customer acquisition and collection.
Fine tune through piloting
- Test products on a small scale first and refine based on customer feedback before full-scale launch.
- This helps perfect pricing, loan terms, collections processes etc.
Design products to meet client needs while also ensuring operational sustainability. Balance growth objectives with prudent risk management practices.
Operations – staffing, software, accounting
Running microfinance operations requires robust processes and systems around:
Staffing
- Hire branch managers with lending experience along with customer service and field/recovery agents.
- Recruit accountants to manage accounting, portfolio reporting and compliance.
- Get support staff for cash management, data entry and admin functions.
- Conduct thorough background verification and training for field staff.
Software
Deploy an integrated MIS software covering loan tracking, collections, accounting, reporting etc.
Ensure it supports different loan products, repayment schedules, and customer management.
Have mobile apps for field agents/officers to record transactions and customer data securely.
A software like Jisort is perfect for your microfinance enterprise.
Credit process
- Document standardized credit policies – application process, appraisal methodology, approval authority matrix, documentation etc.
- Conduct due diligence on borrower’s business, household income sources, other lenders etc.
- Rely on assessments of repayment capacity over collateral.
- Adhere to responsible financing principles and appropriate collections practices.
Loan tracking
- Record entire loan lifecycle events – application, approval, disbursal, repayment, recovery.
- Track loan performance – aging analysis, collections ratios, portfolio at risk etc.
- Generate customer passbooks updated with transactions.
- Send payment reminders via SMS and mobile apps.
Cash management
- Ensure regular cash deposits, sufficient liquidity at branches for disbursals and withdrawals.
- Process daily cash consolidation reports from branches.
- Follow rigorous cash handling procedures with checks and balances.
Accounting and finance
- Produce daily reports on disbursals, repayments, deposits, withdrawals.
- Perform month end tasks, accruals, provisions, portfolio classification.
- Track financial performance – costs, interest income, portfolio yield, arrears, write-offs.
Compliance and reporting
- Generate internal reports for ALCO, risk management and board meetings.
- Submit periodic returns to regulator as per reporting standards.
- Conduct audits and inspections to ensure policies and controls are followed.
Robust processes, controls and technology systems are crucial for the lending and collection cycle, ensuring data integrity and operational efficiency as the institution scales.
Conclusion
Setting up a microfinance company in Ghana requires in-depth planning and preparation across areas like market research, product design, operations, technology and compliance management.
The microfinance sector in Ghana still has growth potential given the large underbanked population but faces challenges around appropriate regulation, high operating costs, low capacity and client education.
Entrepreneurs seeking to establish new microfinance companies need extensive industry experience along with access to patient risk capital. Success comes from designing appropriate products for the low-income segment, leveraging technology to minimize costs, and implementing robust risk management and consumer protection practices.
Microfinance companies have substantial scope for social impact by providing income generating loans, inculcating savings habit, and expanding access to insurance for poorer households.
But they need to balance social objectives with commercial viability through portfolio quality, risk-based pricing and high productivity.
With the right strategies and execution, microfinance companies can profitably serve the underbanked population while upholding responsible financing principles.
This helps advance financial inclusion and inclusive growth in Ghana.
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