Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry ppt

Rural and Micro Finance Regulation in Ghana:
Implications for Development and Performance of the Industry
Africa Region Working Paper Series No. 49
June 2003

Abstract
egislation and regulations governing rural and micro
finance institutions (RMFIs) in Ghana have evolved with
the market, both opening up possibilities for new types of
institutions and tightening up to restrain excessive entry and
weak performance in the face of inadequate supervision
capacity. The result – though not entirely by conscious design
– is several tiers of different types of RMFIs with a strong
savings orientation and a much greater role of licensed
institutions relative to NGOs than is found in many countries.
Small unit Rural and Community Banks (RCBs) are
accommodated in the Banking Act; savings and loan
companies in the Non-Bank Financial Institutions (NBFIs)
Law; and credit unions under a new law being prepared to
recognize their dual nature as cooperatives and financial
institutions. The informal sector is dominated by a variety of
savings-based methodologies, both individual and group.
Supervision of a large number of RMFIs is costly relative to
their potential impact on the financial system (about 7% of
assets), and the Bank of Ghana has adopted a number of
strategies to cope with its limited supervision capacity: raising
reserve requirement for RCBs to as high as 62%; drastically
raising the minimum capital requirement for NBFIs; and
permitting self-regulation of credit unions by their apex body.
It is currently establishing an Apex Bank to serve the RCBs,
link them more effectively to the commercial banking system,

and take the lead in building their capacity and, eventually, in
undertaking front-line supervision. Although the US$2 million
minimum capital requirement makes the S&Ls less accessible
for NGO transformation, it has led to introduction of foreign
capital.
While the RCBs have had limited outreach, some have
effectively partnered with NGOs to introduce microfinance
methodologies such as village banking, and they are now being
strengthened as the backbone for expansion of rural financial
services. Linkages also occur between informal savings-based
“susu” institutions and both RCBs and S&Ls. The Bank of
Ghana has taken a relatively laissez-faire position vis-à-vis the
informal sector.
Liberalization of financial policies in the late 1980s has
enabled RMFIs to develop with relatively little interference,
and without a clearly articulated national strategy.
Nevertheless, continued high inflation and interest rates
(particularly on Treasury Bills) has limited the incentive for
commercial financial institutions to reach out to smaller,
poorer clients (though enabling weak RCBs to improve their
capital adequacy with highly restricted lending).
Furthermore, directed, subsidized loans under current
government poverty programs threaten to undermine loan
performance and weaken the long-run potential for
developing sound, self-sustaining RMFIs on a significant
scale.
While Ghana’s approach has yielded a wide range of RMFIs
and products with the potential for substantial outreach to the
poor and sustainability based on savings mobilization, it has
also permitted easy entry of institutions with weak

management and internal controls. Ghana’s experience
demonstrates the difficulty of striking the right balance
between encouraging entry and innovation on the one hand
and establishing adequate supervision capacity on the other.
In several segments – RCBs, credit unions, S&Ls – Ghana
has gone through a cycle of easy entry, weak performance,
tightening up regulations, and some restructuring (through
closing insolvent units, takeovers, or infusion of new
investment). The Bank of Ghana has exercised considerable
regulatory forbearance in allowing weak units time to comply
with stricter regulations (or, in the case of the credit unions,
to establish a self-regulating system while awaiting passage
of a new law). On the whole, this approach appears to have
succeeded in giving Ghana a very diverse, reasonably robust
system of RMFIs, with relatively little cost in terms of
outright failed institutions (and lost deposits) and moderate
drain on supervisory resources. Nevertheless, the system has
failed to achieve impressive outreach, especially to the rural
poor, and remains burdened by a number of weak units that
the regulatory authorities are not well equipped to turn
around.

Authors’Affiliation and Sponsorship
William F. Steel
Senior Adviser, Private Sector Unit, Africa Region, World Bank
Email:

David O. Andah
Managing Consultant, Consultant Management Enterprise (Ghana)
Email:

The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with potential for improving
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The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they do not necess arily
represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to
them.
L


Rural and Micro Finance
Regulation in Ghana:
Implications for Development and
Performance of the Industry








By


William F. Steel & David O. Andah

June 2003




ii
Foreword

his country study is one of three being
published as part of research on the
implications of legal and regulatory
structures for the development of
microfinance institutions in African countries.
This research is a collaborative effort between
the World Bank’s Financial Sector Operations
and Policy Department and the Financial and
Private Sector Units of the Africa Region, with
funding from the Financial Sector Board and
Africa Regional Programs. The published
country studies on Benin, Ghana, and Tanzania,

together with work on Ethiopia, South Africa,
Uganda, and Zambia in Africa, as well as
experiences drawn from other regions, will form
the basis for a comparative review intended to
provide practical lessons and guidance to
policymakers and donor agencies on how the
structure of legal and regulatory systems may
affect (and in turn be influenced by) the
evolution of microfinance institutions in
different country contexts.
Increasing the access of the poor to sustainable
financial services is an important part of the
World Bank Africa Region’s strategy for
supporting the Millenium Development Goals
for poverty reduction. Convenient and
affordable instruments for savings, credit,
insurance, and payment transfers are essential
both to cope with the economic fluctuations and
risks that make the poor especially vulnerable
and to take advantage of opportunities to acquire
productive assets and skills that can generate
increased income. Microfinance is the
application of innovative methodologies that
make such financial services available to
relatively poor households and microenterprises
in small transactions suited to their conditions.
Innovative microfinance institutions have had
substantial success in making financial services
accessible to the poor in many parts of the
world, and microfinance is increasingly

provided through licensed, commercial financial
institutions capable of mobilizing the funds
necessary to significantly increase the scale of
outreach.
The microfinance sector has evolved and
developed according to different patterns and
growth paths in various countries and regions.
The literature on microfinance identifies the
legal and regulatory framework as one factor
that influences the emergence of different kinds
of institutional providers of microfinance and,
especially, their development into self-
sustaining, commercial microfinance institutions
capable of reaching growing numbers of poor
clients, especially in rural areas. These country
studies provide an assessment of how the legal
and regulatory framework influences the
microfinance sector and the benefits and risks of
different approaches, providing important
lessons for other countries that may be going
through a similar process of establishing or
modifying the legal and regulatory framework
for microfinance.



Gerard Byam
Sector Manager
Financial Sector, Africa Region

T


iii

The authors are grateful for comments on earlier dra
fts from Peer Reviewers Joselito Gallardo
and Rich Rosenberg, as well as from Kwaku Addeah, Stefan Staschen, Andreas Thiele, Antony
Thompson, and workshop participants. The authors also appreciate information and inputs
provided by Ken Appenteng Mensah, Ed
mund Armah, Eyob Tesfaye, Amha Wolday, the
Association of Rural Banks, Bank of Ghana, Ghana Co-
operative Credit Union Association, and
the Ghana Microfinance Institutions Network.





iv
Abbreviations and Acronyms

ADB Agricultural Development Bank

AfDB African Development Bank
ARB Association of Rural Banks
ARBAB ARB Apex Bank
BOG Bank of Ghana
CAMEL Capital adequacy, Assets quality, Management, Earnings and Liquidity
CBO Community-based organization
CUA Ghana Co-operative Credit Unions Association
CUs Credit Unions
DANIDA Danish International Development Agency
DFID Department for International Development (UK)

ENOWID Enhancing Opportunities for Women in Development
FFH Freedom From Hunger
GHAMFIN Ghana Microfinance Institutions Network
GCSCA Ghana Co-operative Susu Collectors Association
GTZ German Agency for Technical Cooperation
IDA International Development Association
IFAD International Fund for Agricultural Development
MFIs microfinance institutions
MOF Ministry of Finance
MSEs micro and small enterprises
NBFIs non-bank financial institutions
NBSSI National Board for Small-Scale Industries
NGOs non-governmental organizations
NRCD National Revolutionary Council Decree

PNDCL Provisional National Defense Council Law
RBs Rural Banks
RCBs Rural and Community Banks
RFSP Rural Financial Services Project (AfDB, GTZ, IFAD, World Bank)

RMF rural micro finance
RMFI rural and micro finance institutions
S&L Savings and Loans Company
SAT Sinapi Aba Trust
SMEs Small and Medium-scale Enterprises
T-bills Treasury Bills
UK United Kingdom
UNDP United Nations Development Program
USAID United States Agency for International Development
WWBG Women’s World Banking Ghana


Table of Contents

Foreword ii
Abbreviations and Acronyms iv
I. Background 1
A. Introduction 1
B. Macroeconomic and Policy Context 2
II. Structure and Performance of Rural and Micro Finance Industry 3
A. Agricultural Development Bank 5
B. Rural and Community Banks 5
C. Non-Bank Financial Institutions 9
D. Credit Unions 11
E. Non-Governmental and Community-Based Organizations 13
F. Donor Programs 15
G. Informal Finance 15
H. Government Credit Programs 18
III. Licensing and Regulatory Framework for Rural and Micro Finance 19
A. Structure and Origins of the Licensing Framework 19

B. Evolution of Regulatory Norms 20
C. Supervision and Monitoring Mechanisms 26
D. Performance of the Supervision System 29
IV. Business and Contract Enforcement Environment 31
A. Registration of RMFIs 31
B. Regulation of Small Business Activity 31
C. Financial Contracts 32
V. Assessment of Impact of Regulation on the Evolution of Microfinance 33
A. Advantages and Drawbacks of Ghana’s Approach 34
B. Conclusions 38
C. Recommendations for Ghana 38
Annex 1: Microfinance Legislation in Uganda and Ethiopia 40
Annex 2: Evolution of Legal Framework for RMFIs 43
Annex 3: Summary of Laws and Regulations for RMFIs and Businesses 46
Schedule 1. Legal and Regulatory Requirements for Different Types of MFIs - Ghana 46
Schedule 2. Classification of Regulations According to Objective – Ghana 47
Schedule 3. Legal Systems and Judicial Processes 47
Annex 4: Reports to Be Submitted by S&Ls, RCBs, and Banks 48
References 49

BOXES

Box 1: Performance Monitoring Data and GHAMFIN 5
Box 2: Types of Group and Individual Savings and Credit Programs 8
Box 3: Inventory Credit Scheme 14
Box 4: Types of Susu (Savings Collection) in Ghana 16

TABLES

Table 2.1: Classification of Rural Banks 6
Table 2.2: Average Size of Ghana’s Rural Banks and Credit Unions Relative to African MFIs 7
Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993 9
Table 2.4: Growth in Credit Unions and Membership, 1968-2001 12
Table 2.5: Performance of Sinapi Aba Trust 13
Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$ 21
Table 3.2: New Reserve Requirements for Rural and Community Banks 23
Table 3.3: S&L Provisioning Rates 25
Table 3.4: RCBs’ Provisioning Rates 25
Table 3.5: Credit Exposure Limit as Percentage of Net Worth 26
Table 3.6: Selected Balance Sheet Items (2001) (¢ million) 29
Table 5.1: Assets of Depository Financial Institutions, 2001 (¢ million) 36



1
Review of Rural and Micro Finance Regulation in Ghana:
Implications for Development and Performance of the Industry

William F. Steel and David O. Andah




I. Background
A. Introduction

The purpose of this paper is to assess how the policy, legal and regulatory framework has

affected – and been influenced by – the development of rural and micro finance institutions
1

(RMFIs) in Ghana, especially in terms of the range of institutions and products available, their
financial performance and outreach (particularly to the rural and lower-income population). This
review of Ghana’s experience is intended to help guide other countries that are in the process of
adopting legislation and regulations for RMFIs. The study also examines how the operation of
RMFIs and their clients may be affected by the impact of business and commercial laws and
institutions on contract enforcement and the operation of businesses.

The potential of microfinance to reach large numbers of the poor is now well understood
(Robinson 2001). Diversity of RMFIs and products is facilitated by a flexible regulatory
environment in which they can develop innovative methodologies for reaching different market
niches not served by commercial banks. Nevertheless, at some point – in the sector’s evolution,
in the growth of a successful RMFI, in the willingness of investors to enter these niches –
regulations are appropriate both to facilitate commercialization and sustainability of the rural and
micro finance (RMF) industry (especially through mobilization of savings from the public) and
to ensure the stability of the financial system (as well as to protect deposits). Difficult decisions
must be made in each country context as to the timing and complexity of regulations in order to
promote orderly development without unduly stifling innovation. This review of Ghana’s
experience, together with comparisons to other country case studies, is intended to draw lessons
on how the timing and design of regulations has developed and affected the diversity, outreach
and sustainability of RMFIs.

Ghana is particularly interesting because it has evolved a tiered system of different laws
and regulations for different types of institutions, largely in response to local conditions, needs
and institutional developments. The resulting system resembles the tiered approach

1
“Microfinance” refers to small financial transactions with low-income households and microenterprises (both

urban and rural), using non-standard methodologies such as character-based lending, group guarantees, and short-
term repeat loans. “Rural finance” includes other instruments and institutions specifically intended to finance rural
activities, both farm and off-farm. The common elements are that the clients being served typically lack the
characteristics (e.g., titled property as collateral) required by commercial banks or are located beyond the reach of
commercial bank branches and that innovative methods and specialized products or institutions are needed to reach
these markets.
2
recommended by the World Bank’s 1999 study of microfinance regulation from the viewpoint of
a regulator trying to assess what characteristics (such as size and taking deposits from the public)
of RMFIs should “trigger” a regulatory response in the sense that the likely benefits would
outweigh the costs of supervising relatively small financial intermediaries (Van Greuning et al.
1999). This approach is being adopted in Uganda, which already has one specialized
microfinance institution under the existing non-bank financial institution category and a licensed
commercial bank offering mainly rural and micro finance services. Uganda’s new (2002) Micro
Deposit-taking Institutions Law provides for central bank licensing of specialized microfinance
institutions that wish to mobilize savings and use them for lending, while leaving credit-only
NGO MFIs and small member-based organizations to operate outside direct regulation (Annex
1a). This approach stands in contrast to the approaches of countries such as Ethiopia, which
allows only one category of licensed RMFI (Annex 1b).
2
While Ghana’s approach has fostered a
wide range of RMFIs, formal and informal (rural banks, savings and loan companies, credit
unions, non-governmental organizations [NGOs], savings and credit associations of various
types, and informal savings collectors and moneylenders), it has not been so successful in terms
of achieving strong financial performance, significant scale, and true commercialization of
microfinance. Although it is premature to judge what approach is most likely to be successful by
these standards, it is an appropriate time to assess the extent to which Ghana’s flexible,
evolutionary, tiered approach is leading the development of RMFIs in the right direction.

After briefly reviewing Ghana’s macroeconomic and policy context in the remainder of

this chapter, Chapter II sets out the structure, products and performance of RMFIs in Ghana, as a
context for examining the evolution of the legal, regulatory and supervisory framework for
RMFIs in Chapter III. Chapter IV briefly reviews relevant aspect of the business and contract
enforcement environment, while Chapter V concludes with an assessment of how the legal and
regulatory environment has affected the development of rural and micro finance in Ghana.

B. Macroeconomic and Policy Context
3


Ghana has a population of about 18 million, which has been growing at about 3% per
year. Recent statistics (1999-2000) indicate that 63% of the population live in rural areas and
37% in urban areas. Gross domestic product (GDP) for 2001 at current prices stands at US$5.36
billion, with an annual growth rate of 4.2%; per capita GNP of US$390 remains lower than the
average per capita income level of US$520 for Sub-Saharan Africa. Inflation and high interest
rates have been a persistent problem; the end-of-period inflation rate rose from 13.8% in 1999 to
40.5% in 2000 before falling to 21.3% in 2001, with 91-day Treasury Bill (T-bill) rates reaching
42% in 2001 before declining to 22% in 2002. Ghana’s financial structure is fairly shallow: the
degree of monetization of the economy stands at 20.7%, as measured by the M2/GDP ratio. With
international reserves at only 1.5 months of imports as of 2001, Ghana’s economy is markedly
vulnerable to external shocks.
Ghana has focused on poverty reduction as the core of its development strategy. This
approach was galvanized in 1995 with launching of the first version of Ghana – Vision 2020

2
Savings and credit cooperatives are also permitted, but under the Department of Cooperatives rather than the central
bank.
3
This section draws extensively from Gallardo (2002), with updating of the figures.
3

initiation of institutional arrangements to promote and analyze poverty reduction. The
Government prepared a Development Strategy for Poverty Reduction in 2000 and has since
prepared the Ghana Poverty Reduction Strategy 2002-2004: An Agenda for Growth and
Prosperity. Poverty in Ghana has decreased from 51% of the population in 1991-92 to about
43% of the population living below the poverty line in 1998, although the average consumption
level of the poor in Ghana is about 30% below this level.
4
The reductions in poverty levels have
tended to be concentrated in the Accra and the rural forest areas. Poverty remains substantially
higher in rural areas (52%) than in urban areas (23%), and more than one-half of the population
living in the rural savannah zones continue to be extremely poor. Poverty is highest among the
self-employed households cultivating agricultural crops, and has decreased only slightly
compared to the self-employed households engaged in export-crop agriculture and the wage
employees in the public and private sectors.
The overall policy framework for microfinance is informed by the poverty reduction
strategy, which seeks to balance growth and macroeconomic stability with human development
and empowerment in such a way as to positively reduce the country’s poverty levels in the
medium term. The strategy identifies the main sources of poverty, and aims to assess all sectoral
strategies and programs in terms of the extent to which they contribute to reducing poverty. The
overall strategy emphasizes the reduction of inflation and the need to sharply reduce the fiscal
deficit, as a key step to reduce the extent of the public sector’s crowding out of the private sector
in the financial markets, and to help lower interest rates.
A microfinance strategy paper was prepared through a consultative process in 2000, but
was never taken up by Cabinet before a change of government. The poverty focus has led the
new regime to expand directed, subsidized credit programs that are not consistent with best
practices in microfinance and tend to undermine development of the industry.
II. Structure and Performance of Rural and Micro Finance Industry
This chapter analyzes the different types of RMFIs in Ghana and their financial products,
from the more formal and licensed to the less formal and unregulated. The financial system in
Ghana falls into three main categories: formal, semi-formal, and informal:

• Formal financial institutions are those that are incorporated under the Companies Code
1963 (Act 179), which gives them legal identities as limited liability companies, and
subsequently licensed by the Bank of Ghana (BOG) under either the Banking Law 1989
(PNDCL 225) or the Financial Institutions (Non-Banking) Law 1993 (PNDCL 328) to
provide financial services under Bank of Ghana regulation. Most of the banks target
urban middle income and high net worth clients. Rural and Community Banks (RCBs)
operate as commercial banks under the Banking Law, except that they cannot undertake
foreign exchange operations, their clientele is drawn from their local catchment area, and
their minimum capital requirement is significantly lower. Some collaborate with NGOs
using microfinance methodologies. Among the nine specified categories of non-bank

4
The upper poverty line in 1998 was set at C900,000, or about US$389 at the time.
4
financial institutions (NBFIs),
5
the Savings and Loans Companies (S&Ls), which are
restricted to a limited range of services, are most active in micro and small-scale financial
intermediation using microfinance methodologies. One leasing company has opened a
micro-leasing window.

• Non Governmental Organizations (NGOs) and the Credit Unions (CUs) are considered to
be the semi formal system, in that they are formally registered, but are not licensed by
the Bank of Ghana. NGOs are incorporated as companies limited by guarantee (not for
profit) under the Companies Code. Their poverty focus leads them to relatively deep
penetration to poor clients using microfinance methodologies, though mostly on a limited
scale. They are not licensed to take deposits from the public and hence have to use
external (usually donor) funds for micro credit. Credit Unions are registered by the
Department of Cooperatives as cooperative thrift societies that can accept deposits from

and give loans to their members only. Although credit unions are included in the NBFI
Law, BOG has allowed the apex body Ghana Cooperative Credit Union Association to
continue to regulate the societies pending the introduction of a new Credit Union Law.

• The informal financial system covers a range of activities known as susu, including
individual savings collectors, rotating savings and credit associations, and savings and
credit “clubs” run by an operator. It also includes moneylenders, trade creditors, self-
help groups, and personal loans from friends and relatives. Moneylenders are supposed
to be licensed by the police under Moneylenders Ordinance 1957.

The commercial banking system, which is dominated by a few major banks (among the
17 total), reaches only about 5% of households, most of which are excluded by high minimum
deposit requirements. With 60% of the money supply outside the commercial banking system,
the rural banks, savings and loans companies, and the semi-formal and informal financial
systems play a particularly important role in Ghana’s private sector development and poverty
reduction strategies. The assets of RCBs are nearly 4% of those of the commercial banking
systems, with S&Ls and CUs adding another 2%. The term “rural and micro finance
institutions” (RMFIs) is used to refer collectively to the full range of these institutions – though
recognizing that they use different methodologies to reach different (albeit overlapping) clientele
among farmers, rural households, the poor, and microenterprises, and hence that different
regulatory and supervisory instruments may be appropriate. Although systematic data are not
available across these different categories (see Box 1), the institutions in each segment are
discussed below based on the best information available.

5
Including Credit Unions, which are in the law but have not yet been brought under the jurisdiction of BOG in
practice, pending passage of new legislation.
5

Box 1: Performance Monitoring Data and GHAMFIN

Information on the rural and micro finance industry is very dispersed, when it is available. Data
on RCBs and S&Ls are available from three departments of BOG (Banking Supervision, NBFI and
Research Departments), only some of which is published in its quarterly and annual reports. CUA has
information on Credit Unions, but only a small fraction is published in the Annual Reports of the
Department of Cooperatives. The information published is scanty and does not address the main issues of
RMF development. No consistent data are available on the non-licensed semi-formal and informal
RMFIs.
An attempt to remedy this situation is being undertaken by the Ghana Microfinance Institutions
Network (GHAMFIN), which was established in the late 1990s by a group of RMFIs as a network of
microfinance institutions. Its membership cuts across the formal, semi formal and informal institutions
and includes consultants, researchers and service providers to RMFIs. Although not all RMFIs are
members, it does include the major associations that represent key groups of RMFIs (ARB, CUA, and
susu collectors). GHAMFIN’s objectives include serving as the knowledge center for the industry and
monitoring and benchmarking performance.
GHAMFIN has developed a monitoring system based on the methodology of the Micro Banking
Bulletin, which has been piloted with a small sample of rural banks. It is also undertaking a geographic
mapping of different types of RMFIs. When well developed, the benchmarks and performance standards
will be reference points that can be used by the unregulated RMFIs (especially NGOs) for self-regulation
and by donors, BOG and MOF to monitor the growth and performance of the sector. GHAMFIN also has
a simpler survey instrument that would give a basic profile of responding institutions. In 2002-03
GHAMFIN and other apex bodies (supported by GTZ and the Rural Financial Services Project) collected
basic data on the size, location and performance of different categories of RMFIs to provide a baseline as
a basis for more systematic monitoring in the future.

A. Agricultural Development Bank

While the ADB has played an important role in making finance available for agriculture,
it suffered from poor economic conditions in the 1970s and early 1980s, poor repayment, and
other problems, resulting in negative net worth by the end of the 1980s and restructuring in 1990.
Furthermore, “the share of smallholder credit in ADB’s total lending declined to 15 per cent in

1992, while the share of lending to agriculture fell to 30 per cent,” and short-term loans
accounted for some 80% of lending (Nissanke and Aryeetey, p.63). The share of smallholders
has since risen to 24% in1999 and the share of agriculture loans to 51%. After restructuring of
ADB to permit universal banking, its financial profitability has improved, but it has remained
subsidy-dependent (Kowubaa 2000, pp.31-32).

B. Rural and Community Banks

The Rural and Community Banks are unit banks owned by members of the rural
community through purchase of shares and are licensed to provide financial intermediation in the
rural areas. Rural Banks (RBs) were first initiated in 1976 to expand savings mobilization and
6
credit services in rural areas not served by commercial and development banks.
6
The number
expanded rapidly in the early 1980s in response to the demand for rural banking services created
by the government’s introduction of special checks instead of cash payment to cocoa farmers.
The small number of rural outlets of commercial banks were woefully inadequate to meet the
demand to cash these checks, let alone provide other banking services, creating undue hardships
on farmers who often had to travel long distances or spend days at the banks to cash their checks.
More RBs and agencies were, therefore, hurriedly opened to help service areas without banking
facilities.

The strong promotion of RBs to service the government’s policy of paying cocoa farmers
by check had adverse consequences for their financial performance.
7
Through a combination of
rapid inflation, currency depreciation, economic decline, mismanagement of funds and natural
disasters (especially in 1983), combined with weak supervision, only 23 of the 123 RCBs
qualified as “satisfactory” in 1992 when the classification started (Table 2.1).

The obvious need for re-capitalization and capacity-building was addressed during 1990-
94 under the World Bank’s Rural Finance Project, with half of them achieving “satisfactory”
status by 1996 (Table 2.1). The combination of very high (62%) primary and secondary reserve
requirements imposed by BOG in 1996 and high T-bill rates helped to reduce the risk assets and
increase net worth, further improving their financial performance. The number of RCBs reached
a peak of 133 in 1998, but fell to 111 in 1999 with the closure of 23 distressed banks and the
commissioning of one new bank. These closures sent a strong signal to the remaining rural
banks to maintain or improve their operations in order to achieve satisfactory status. Between
1999 and 2001 there was 64% increase in the number of satisfactory banks.

Table 2.1: Classification of Rural Banks
Category 1981 1986 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
No. of
“Satisfactory”

a
- - 23 43 57 53 61 59 52 53 64 87
Mediocre - - 82 61 51 54 50 55 58 56 47 27
Distressed
b/
- - 18 19 19 18 17 17 23 2
c/
2
c/

-
Total 29 106 123 123 127 125 128 131 133 111 114
d/
115

e/

Source: Addo 1998, pp.27-29. BOG Annual Reports, Banking Supervision Department
a/

Based on compliance with a 6% capital adequacy ratio (a relatively low standard for RMFIs). The classification
system was changed in 2002 to focus instead on loan portfolio performance (as a determinant of reserve
requirements).
b/
Based on solvency.
c/
Allowed only to handle workers’ salary payments.
d/
Includes 2 licensed at the end of the year.
e/
Includes 1 licensed at the end of the year.




6
The concept was extended to an urban Community Bank in 1987; see Annex 1. There is no limit on the number of
shares that an individual can own. “RCBs” is used to refer to the entire category (since 1987); “RBs” is used to refer
solely to Rural Banks.
7
“The rural banks have been moderately successful at savings mobilization in the rural areas. In 1993 their share of
total deposits mobilized and credit extended to the agriculture sector by both banks and credit unions stood at 27 per
cent and 18 per cent respectively….but the capital base is weak and paid-up capital, income surplus and reserves
constitute only 7.5 per cent of total resources” (Nissanke and Aryeetey 1998, p. 63).
7

During the 1990s, some of the RCBs adopted a more commercial approach and
introduced innovative programs – often in collaboration with NGOs that offered proven
microfinance methodologies, such as Freedom From Hunger’s Credit with Education program.
A few RCBs have succeeded in expanding to over 20,000 clients and reaching high levels of
operational and financial sustainability.
8
The total number of recorded depositors in all RCBs is
1.2 million, with about 150,000 borrowers (some of them groups of 5 to 35 members, so actual
outreach is somewhat greater). On average, however, RCBs are relatively small compared even
to African MFIs, especially in terms of lending – though relatively profitable, thanks in large part
to past high reserve requirements and interest rates (Table 2.2)

Table 2.2: Average Size of Ghana’s Rural Banks and Credit Unions Relative to African MFIs
Indicator (average) African MFIs*

Rural Banks Credit Unions

Number of clients 7374

8488

405

Loan balance $119

$30

$153

Total loan portfolio $690,027

$251,924

$65,180

Total assets $1,612,029

$841,102

$110,961

Capital/assets 60.3%

2.6%

3.5%

Return on assets -16.1%

4.4%

N/A

Source: Sample survey data from Kowubaa 2000, p.60. S&Ls were not sampled.
*From the Micro-Banking Bulletin.


The Association of Rural Banks (ARB) was founded in 1981 as an NGO with voluntary
membership, starting with 29 members and reaching 115 at end of 2001. The association was

formed out of the need “to promote and strengthen the rural banking concept”. This is carried
out through advocacy and training. Under the Rural Finance Project, financed with a World
Bank/IDA credit in 1991, and with DANIDA assistance, ARB trained 2341 directors and 2559
staff members of the RCBs (Osei-Bonsu, 1998). The training has been in the general areas of
Governance and Leadership, Management and Operations.

ARB has no statutory authority and influences its members through persuasion and
training seminars. The association initiated the proposal for the ARB Apex Bank, licensed in
2001 to perform apex financial services for RCBs and, eventually, to take over some supervisory
and training functions. The Association will remain an NGO, concentrating on advocacy goals in
promoting the rural banking system and maintaining the rural banking network of Directors and
Managers.

Products and Practices

Originally, RBs made standard commercial loans to individuals or groups, often related
to agriculture. While term lending may have been justified by the agricultural planting cycle or

8
For example, Nsoatreman Rural Bank was reported in 1998 to have 25,587 depositors (average balance of US$38)
and 17,584 borrowers (average loan size US$190), 130% operational self-sufficiency and portfolio in arrears under
4%.

8
investment in a productive asset, it tended to result in portfolio performance problems, as
borrowers had difficulty making balloon payments and RBs had weak capacity to follow up and
enforce repayment. During the 1990s, however, a number of the more progressive RCBs drew on
emerging microfinance techniques to introduce new programs for saving and credit, often in
association with NGOs that could provide the expertise in implementing the approach. Loans of
this type are generally short-term (4-6 months) with weekly repayment, averaging around $50-75

but ranging up to several hundred dollars, with compulsory up-front savings of 20% that is
retained as security against the loan, complementing group or individual guarantees as the other
principal form of security (see Box 2 for four interrelated methodologies).

Box 2: Types of Group and Individual Savings and Credit Programs
Group savings with credit: A group of members (whether pre-existing or formed for this purpose) open a
joint bank savings account and mobilize initial savings deposits to qualify for a loan. Group savings may
be used as security against loans, and also are used to invest in T-bills for the group. Groups usually are
made up of 3-4 sub-solidarity groups.
Group and individual savings with credit: Group members contribute to both a joint group account and
their individual accounts. The group may be a “village bank” of 25-40 members; or as small as 5
members. While both individual and group savings accounts are used as collateral, the individual account
includes the member’s additional personal savings. Loan repayments are made by individuals but
handled through the group account. Examples include Nsoatreman, Bosomtwe, and Lower Pra RBs.
Individual savings with group credit: Individuals lodge their savings through the group, which receives a
loan for distribution to members after a qualifying period and collection of the required level of savings,
and they continue to save into their individual accounts as they repay the loan. The group handles the
collection of savings and repayments, acts as the interface with the loan officer, and bears group
responsibility for recovery (though the loans are made to individual members). Example: Freedom from
Hunger’s Credit with Education program, operated through Brakwa, Lower Pra, Nsoatreman and Nandom
RBs, Bulsa Community Bank, and Women’s World Banking Ghana (Quainoo 1997, p. 47).
Individual savings with credit: direct lending to individuals, either those who had established a credible
history as a member of a group but who need larger or separate loans, or in cases where a group approach
is not suitable. Examples: Lower Pra RB; Nsoatreman RB’s District Assembly Poverty Alleviation
Program.

Source: Chord 2000.

Some RCBs also have tried to develop linkages with susu collectors (GHAMFIN 2001)
or have served community-based organizations (CBOs) associated with donor programs. RCBs

may also use NGOs to perform ancillary services; for example, Nsoatreman Rural Bank pays a
2% commission to an NGO that helps identify, mobilize and educate rural groups on accessing
credit through an IFAD program, as well as to assist in loan monitoring and recovery (Owusu
Ansah 1999, p. 13). These growing linkages between RCBs and NGOs, CBOs and susu
collectors provide an important foundation for greater outreach to rural poor clients, with the
RCBs providing a decentralized network of licensed financial institutions in rural areas and the
others providing the grassroots orientation that permits reaching relatively poor, remote clients
with small transactions. The Rural Financial Services Program includes measures specifically to
promote such linkages, building on such approaches in previous IFAD programs.
9
To facilitate savings collection, some RBs (such as Akwapem and Lower Pra) have
introduced Mobile Banking, whereby officers visit rural markets on certain days to collect
savings and provide loans (whether to groups or individuals with guarantors). They consider this
to be a profitable formal adaptation of the susu system.

C. Non-Bank Financial Institutions

Table 2.3 shows the rapid growth in the number of NBFIs following passage of the new
law in 1993.
9
Except for finance houses, growth has stalled since 1998, in part because new
applicants have been unable to keep up with increases in the minimum capital requirement.

Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993
Type of NBFI 1994

1995

1998

2001

Savings & Loan* 2

5

7

8

Leasing & Hire Purchase 0.

5

6

6

Finance Houses 0.

7

12

16

Discount Companies 1

2

3

3

Building Societies 1

2

2

2

Venture Capital 0

1

1

2

Mortgage Finance 0

1

1

1

Total (except CUs)
4

23

32

38

Source: Bank of Ghana. No acceptance house has been licensed.
*An additional S&L was licensed and began operation in 2002.

Savings & Loan Companies

Initial licensing of the new S&L category was difficult and long-delayed, as the BOG
grappled with how to implement the new law. The required minimum capital (¢100 million or
US$150,000) initially posed a hurdle, but its real value was eroded by rapid inflation, and the
number of S&Ls grew from three in 1995 to seven by 1998. By 2002 the eight S&Ls had over
160,000 depositors and 10,000 borrowers. Increases in the minimum capital requirement in 1998
and 2000 restored the dollar value through a ten-fold increase in the nominal value, which stalled
the rate of new entry (discussed further in section III.B). As of June 1999, all of the five
outstanding applications for S&L licenses lacked adequate capital to comply with the increased
minimum which was raised further in 2001 to about US$2 million.

Nevertheless, the S&L category has proven to be a flexible means of regularizing three
types of MFIs through:
• transformation of NGOs into licensed financial intermediaries;
• formalization of actual or potential informal money-lending operations;
• establishment of small private banking operations serving a market niche.


9

Credit Unions are discussed separately below because they already existed under a separate regime and have not
yet been brought under BOG.
10
The first license as an S&L went to Women’s World Banking Ghana (WWBG) in 1994,
representing the first transformation of an NGO into a licensed financial institution.
10
Its success,
however, was limited by different views of its mission and commercial orientation between its
Board and management and by its failure to establish a high-performing, growing loan portfolio,
and it is likely to have difficulty complying with the minimum capital and prudential
requirements established in 2001. Sinapi Aba Trust is expected to become the second NGO
transformation (discussed below). EMPRETEC, an NGO providing training for micro and small-
scale businesses, is also trying to meet the paid-up capital requirement for an S&L.

Some of the S&Ls that have become licensed fall into a category that might be termed
potential moneylenders who wish to enter the formal financial system to be able to mobilize
savings as an additional source of funds. The principal promoters or shareholders of such S&Ls
are entrepreneurs with little experience in financial services but who have surplus funds and high
motivation. Among the S&Ls, First Allied has become one of Ghana’s largest RMFIs, reaching
51,049 depositors with ¢25.5 billion (US$3.4 million) and 2,820 borrowers with a total loan
portfolio of ¢10.3 billion (US$1.4 million) in 2001, although it serves only the local market
around Kumasi, the second largest city in Ghana.

The S&L category has also made possible the entry of private investment to serve a
particular market niche on a smaller scale than would be required for a commercial bank. The
first in this category was Citi S&L, established in 1994 on commercial banking principles but
based in local markets with traders and susu collectors as the main depositors.
11
While Citi was
an innovator in its linkages with susu collectors and especially susu clubs, its financial

performance has been constrained by earlier problems with its loan portfolio. It represents both
an interesting success in applying commercial principles to microfinance and innovating in
commercial-informal financial linkages; and a challenge to the supervisory authorities in
applying the regulatory guidelines to ensure discipline as well as innovation.

The advantage of having a regulatory niche suitable for specialized MFIs is also apparent
in the establishment of Sikaman S&L Company Ltd., promoted by Internationale Projekt Consult
of Germany, which is designed to apply international best practices in microfinance to reach
profitable operation in less than two years. Sikaman began operations in 2002 with a staff of 24
as the only S&L whose shareholders are entirely corporate bodies (all but one foreign).
12
The
increased paid-up capital requirement diluted the local ownership from 30% to 2.5% when one
local partner institution dropped out and the other could not raise the additional funds.

10
Initially, only the Mutual Assistance Susu scheme was licensed, as a subsidiary of the NGO, but subsequently
WWBG itself adopted S&L status.
11
Although not originally conceived as a microfinance institution as such, Citi’s commercial approach to serving
essentially the same market soon brought it within the ambit of the international microfinance industry. This
enabled it to access not only new approaches and technical assistance, but also funds. Some of these funds,
unfortunately, entailed foreign exchange risk, which resulted in conversion of debt to equity when depreciation of
the Cedi made repayment impossible to a foreign NGO. With a takeover by new private investors in 2001 to meet
the new minimum capital requirements, it is shifting a larger proportion of its loan portfolio toward small and
medium-scale enterprises.
12
After raising sufficient capital pledges to reach the required minimum in 2000, the promoters had to return to their
foreign shareholders (Internationale Micro Investitionen of Germany, International Finance Corporation of USA,
FMO of The Netherlands and Stichting DOEN of The Netherlands

) to meet the revised minimum capital
requirement of US$2 million in 2001.
11

Products and Practices

The S&Ls generally use the loan products described above under RCBs. For example,
First Allied S&L uses a group and individual savings with credit scheme with existing, registered
occupation-based groups such as butchers, kente weavers, carpenters, and other associations
(Chord 2000). S&Ls have also been leaders in innovating. Citi S&L uses Susu Clubs or any
other economic association for their group loan product, with joint group guarantee and savings
bank balance up to 50% of loan amount. It has pioneered linkages with susu collectors as well as
clubs, including through other forms of individual loan products. Citi also has a micro-leasing
product available to clients with at least two successful loan terms (Anin 2000).
Leasing Companies

Although leasing companies have substantial potential to assist SMEs by solving the
collateral problem that makes it difficult for them to obtain loans, this market has so far gone
untapped in Ghana. One leasing company initially targeted this market niche in the late 1990s
and attempted to set up a “Micro-lease” subsidiary. However, successive increases in the
minimum capital requirement disrupted the planned establishment of this subsidiary as an
independently licensed NBFI, and led the leasing company eventually (in 2001) to establish a
micro-lease department (mainly for SMEs) as a business line within the existing company, rather
than spinning it off.

D. Credit Unions

Credit Unions are thrift societies offering savings and loan facilities exclusively to
members. The first credit union in Africa was established at Jirapa in the Northern Region (now

Upper West) in 1955 by Canadian Catholic missionaries. By 1968, when they were brought
under legislation and the Credit Union Association (CUA) was formed as an apex body, there
were 254 CUs (64 of them rural) with some 60,000 members (Quainoo 1997). The number of
CUs continued to grow to nearly 500 by the mid-1970s, but their financial performance was not
particularly strong. High inflation in the late 1970s eroded their capital, and by the early 1990s,
the number of CUs had fallen by half. Other causes of the decline included droughts in the
1980s, which severely slowed down economic activities, and the Government’s labor
redeployment exercise, which led to many workers being laid off (Ghana CUA 2002). Many of
the remaining CUA members were inactive, especially in community-based ones (Table 2.4).

At the end of 2002 CUA had 253 affiliates with 123,204 members (about a quarter of
them Study Groups in the process of becoming full credit unions). Credit unions average about
400-500 members, and their average loan size of US$153 is well above that for African MFIs, as
well as for RCBs
13
(Table 2.2).

The weak financial performance of CUs has been due in large part to their organization
as cooperative societies with a welfare focus, and in particular to their policy of low interest rates

13
This is probably because 59% of the CUs are workplace-based, with 71% of the membership serving a more
middle-class salaried clientele than the community based ones.
12
Table 2.4: Growth in Credit Unions and Membership, 1968-2001
Year Number Membership
1968 254 60,000
1972 204 27,405
1976 457 48,705
1980 310 49,103

1984 233 55,170
1988 330 65,052
1992 223 44,068
1996 228 51,423
2000 225 70,046
2001 232 96,052
2002 253 123,204
Source: Ghana Credit Union Association (CUA).

on loans.
14
While this benefited those members who received loans (usually after long delay,
and less than requested), the corresponding low returns on savings (or equity shares) discouraged
mobilization of resources. Furthermore, many CUs invested share capital in-group assets such as
tents and furniture that members could rent for social events – again at “favorable” rates that
meant low return on the investment.

CUA is a private association of cooperative societies, independent of the government.
While CUA has attempted to establish a financial reporting system for its members, in fact the
quality of the data is poor and little used for management purposes by the member societies,
whose capacity is quite limited and whose managers, as well as Board and members, tend to
have little understanding of the business of financial intermediation. “According to CUA’s own
classification, over 70% of all Ghanaian credit unions were in an ‘unsatisfactory’ situation as of
April 1996, and 42% of them were placed in the worst category” (Camara 1996). By the end of
2001, these ratings had improved to 60% and 15%, respectively, and the share given the top
rating for financial soundness had improved significantly to 29% (CUA 2002).

Products and Practices:

Individual members make predetermined periodic deposits

15
into their accounts and may
borrow up to two times their savings balance. Most CUs require borrowers to provide security,
in addition to being in good standing with their deposits. Ideally, this can be in the form of a
guarantee from another member of the credit union who has adequate uncommitted savings
balance. Some CUs use the susu method in the collection of deposits and loan repayments. CUA
is an innovator in providing both credit insurance (which pays off the outstanding loan balance in
case of the death of a borrower) and a contractual savings program (which matches savings, up
to a limit, if held at death or to maturity) (Gallardo et al. 2002).

14
In 1995 the rate on loans was raised to 3% per month and interest on savings of 5% per quarter was introduced in
place of the previous system of charging 1% per month on loans and only paying dividends to shareholders out of
year-end profits (if any).
15
CUA regulations state a minimum of ¢20,000 (US$2.70) for a workplace society and ¢10,000 (US$1.40) for a
community-based society.
13

E. Non-Governmental and Community-Based Organizations

NGOs have facilitated the development of good microfinance practices in Ghana by
introducing internationally tested methodologies, often in partnership with RMFIs (reviewed in
depth in Chord 2000). The methodologies introduced by these NGOs often are based on group
solidarity methods, and have benefited from linkages with CBOs that have already “come
together on the basis of some kind of location, occupations, friendship, family ties, gender, or
other grounds to serve a purpose at the community level” (Chord 2000, para. 3.2). This can save
the long and expensive process of promoting and training prospective groups – although “some
CBOs also have procedures and modalities of doing things that may not suit the micro finance
scheme.”

16
NGOs and CBOs are particularly important in making financial services available in
the northern part of the country, where both commercial and rural banks are scarce – although
they tend to be somewhat localized and dependent on donor funds, in part because the relative
poverty of the area and their association with welfare-oriented programs and NGOs.

Unlike Uganda, Ghana lacks NGOs whose primary mission is microfinance (Women’s
World Banking Ghana began as an NGO, but became an S&L). Although some 50 NGOs have
active microcredit programs, they are generally multipurpose or welfare-oriented agencies (only
four exceed 3,000 clients and total outreach is only about 60,000 clients; GHAMFIN 2003). The
principal exception is Sinapi Aba Trust (SAT), which was established in 1994 and presently has
16 branches all over the country, offering both group-based and individual loans. As shown in
Table 2.5, SAT has reached financial and operational sustainability and sufficient scale to qualify
and succeed as a licensed S&L. The ability to take and intermediate savings would free it from
its current reliance on RCBs and other intermediaries to handle clients’ funds and on donor funds
to finance its lending.
17
The SAT S&L would be set up as a micro finance provider separate
from SAT NGO, which will provide technical services. While it was ready to meet the previous
minimum capitalization of C1 billion, its transformation has been stalled by the necessity to raise
15 times that amount, as well as by the costs of preparing to comply with BOG’s rigorous
reporting requirements.
Table 2.5: Performance of Sinapi Aba Trust

1996

2001

2002 Jan Mar.

Value of Loans ¢0.7 billion

¢28.5 billion

¢11.5 billion

Number of Clients 1,741

24,396

23,260

% Women 70%

90%

90%

Operational Sustainability 95%

139%

199%

Financial Sustainability 48%

103%

140%

Default Rate 6.3%

2.6%

3.7%

Portfolio at Risk 6.9%

4.0%

6.1%

Source: Sinapi Aba Trust.


16
“For example, one RB reported that the loan repayment of the 31
st
December Movement (an NGO with political
undertones) was only 75% compared to over 80% as the lowest among the other groups” (Chord 2000, para. 3.2.3.i).
17
It is affiliated with Opportunity International, and receives funding from the Agence Française de Développement,
DFID, Hilden Charitable Fund (UK), Microstart (UNDP), and USAID.
14
Products and Practices

The models used by NGOs correspond to those described in Box 2, and indeed are often
introduced by the NGOs in collaboration with RCBs or other RMFI partners. “Village banking”
is a group and individual savings with credit methodology promoted by some NGOs, notably
Catholic Relief Services and the SNV/Netherlands Development Programme. It is an adaptation

of the Grameen Bank model as further adapted by K-REP (Kenya), in which both share capital
and savings deposits are mobilized from members (with a one-third match from the donor
agency, in the case of the SNV program). Loans are made to groups of ten members, but
benefiting only half of them at a time and reaching the second half only after repayment of the
initial loans. Loans are limited to the combined savings of the individual applicant and guarantor
plus the one-third supplement, with an interest rate of 40% per annum (Chord 2000, para.
2.10.2). The village banks are in the process of registering with CUA as Study Groups.

Freedom From Hunger’s (FFH) Credit with Education program uses individual savings
with group credit to target women and provide accompanying education on health, nutrition,
family planning, financial planning and budgeting, and microenterprise development. Group
members make mandatory savings contributions for at least three months before qualifying for a
loan. Increasing repeat loans are made on four-month cycles with an interest rate of 3-4% per
month. FFH trains the loan officers for partner RMFIs (mainly RCBs) and the groups handle the
bookkeeping of members’ savings and repayments, so the program can be quite profitable –
although the reserve requirement has constrained growth using RCBs’ own mobilized savings.

An inventory credit scheme developed by one NGO on the warehouse receipts model has
led several commercial banks to adopt this form of lending (Box 3). With respect to linkages
between CBOs and RMFIs, conditions for success emerging from an evaluation of different
schemes include (Chord 2000, para. 3.2.7):
• “Empowerment of the groups through training and logistic support that enables them
to fully co-operate with the MFIs and sustain the project;
• Frequent reporting that keeps each other abreast with developments in the scheme;
• Transparency and participatory nature of the interactions;
• Well-established procedures for record keeping and accountability.”

Box 3: Inventory Credit Scheme
Technoserve has developed an inventory credit scheme that enables farmers’ groups to obtain
higher value for their crops by providing post-harvest credit through linkage with a RMFI, using stored

crops as security for credit, through cooperative group management by farmers producing maize, oil palm
and cashews. Instead of selling all of their crop at harvest – when prices are lowest – in order to meet
cash needs, small-scale farmers in the scheme store their crop in a cooperatively-managed warehouse and
receive a loan of about 75-80% of the value of the stored crop, which serves as collateral. This loan
permits them to clear their accumulated debts and satisfy immediate cash requirements. Subsequently,
when prices have risen in the off-season (by as much as double, in the case of maize), the farmers either
sell the stored crop or redeem it for home consumption. Even after deducting a storage fee and a margin
for the cooperative, farmers typically realize significant profits by waiting for the higher prices to sell (or
avoiding having to buy at off-season prices for home consumption).

Source: Africa Region 1997; Quainoo 1997.
15
F. Donor Programs

Most donor-supported programs use the microfinance methodologies described above
under Rural and Community Banks, and often work through existing NGOs and other
organizations. Examples include the SCIMP Solidarity Group System (group savings with
credit) and ENOWID (group and individual savings with credit) (Chord 2000).

G. Informal Finance

Moneylenders

By the mid-1960s, moneylending had become more of a part-time activity by traders and
others with liquid funds than a full-time profession (Offei 1965, cited in Aryeetey 1994, p.16).
Loans from moneylenders typically average 3 months and rarely are made for more than 6
months (though some borrowers may take longer). The typical interest rate in the early 1990s
was 25-30% for a 3-month loan; this represented a decrease from the 1983 rate of 100% on loans
under 6 months, reflecting some market sensitivity to lower inflation and increased liquidity in
the post-reform period (Aryeetey 1994, pp. 30-32).

Moneylenders invariably require security, preferably in the form of physical assets such
as buildings, farmland and undeveloped land. Unlike commercial banks, moneylenders incur
little transaction costs in enforcing pledges of such collateral made before family members or
traditional authorities, as the moneylender can simply make use of the property until the debt is
repaid. Loans to employees, including civil servants, are often secured by an arrangement with
the paymaster. Verbal guarantees from family heads, friends and relatives may also be accepted
as security.

The importance, and certainly the registration, of individual moneylenders may have
been reduced by the emergence of rural banks, Credit Unions, susu associations and clubs, and
especially S&Ls, which has enabled moneylending-type operations to become licensed.
“Official statistics indicate that in 1972, there were 33 licensed money lenders in Accra Region.
By 1988 the number has dwindled to 4” (Anin 2000). These days most individual moneylenders
do not hold licenses or operate full time, and the Ordinance has ceased to be of any importance,
although it remains in the statute books.

Susu Collectors, Associations, Clubs, Companies and Products

The susu system (see Box 4)
18
primarily offers savings products to help clients
accumulate their own savings over periods ranging from one month (susu collectors) to two
years (susu clubs), although credit is also a common feature. All members of a susu ROSCA
group except the last receive their lump sum earlier than if they saved on their own, and susu
club operators try to attract more clients by advancing members’ target savings amount well

18
Although the word “susu” has meaning in Twi, a Ghanaian language, the system is thought to have originated
from Nigeria, where it is known as esusu or osusu.

16
before the end of the cycle.
19
Even susu collectors give occasional advances to their best
customers before the end of the month, and in some cases may make loans of up to three months
– though their ability to do so is constrained by the fact that they generally lack capital apart
from the savings they mobilize. In an effort to capitalize on susu collectors’ intimate knowledge
of their clients, several RCBs and S&Ls participated in a pilot program to provide funds to susu
collectors for them to on-lend to their clients (GHAMFIN 2001), and some have continued with
their own funds.

Box 4: Types of Susu (Savings Collection) in Ghana
Ghana has at least five different types of institutions known as, or offering products termed susu
• Susu collectors: individuals who collect daily amounts set by each of their clients (e.g., traders in
the market) and return the accumulated amount at the end of the month, minus one day’s amount as
a commission;
• Susu associations or mutualist groups are of two types: (i) a rotating savings and credit association
(ROSCA), whose members regularly (e.g., weekly or monthly) contribute a fixed amount that is
allocated to each member in turn (according to lottery, bidding, or other system that the group
establishes); (ii) accumulating, whose members make regular contributions and whose funds may be
lent to members or paid out under certain circumstances (e.g., death of a family member);
20

• Susu clubs are a combination of the above systems operated by a single individual, in which
members commit to saving toward a sum that each decides over a 50- or 100-week cycle, paying a
10% commission on each payment and an additional fee when they are advanced the targeted
amount earlier in the cycle; they have existed at least since the mid-1970s, quite likely earlier;
• Susu companies existed only in the late 1980s as registered businesses whose employees collected
daily savings using regular susu collector methodology, but promised loans (typically twice the
amount saved) after a minimum period of at least six months.

• Some licensed financial institutions (commercial banks, insurance companies, RCBs, S&Ls, and
credit unions) have offered a systematic savings plan termed “susu,” sometimes hiring employees
to go out and gather the savings in the manner of a susu collector. The State Insurance Corporation
first introduced such a “Money Back” product in the 1980s, including a life insurance benefit for
clients as an additional incentive to mobilize savings, but the scheme was discontinued in 1999 .

The susu collectors are the most visible and extensive form. Even though they mobilize
savings, the central bank has refrained from attempting to regulate them, leaving them to try to
improve the reputation and quality of the industry through self-regulation (discussed below).
21


19
Citi S&L was able to gain susu club operators as clients not only by providing a safe place for weekly sums
mobilized, but also by providing loans that would enable the operators to offer more advances than they would have
been able to make out of their own accumulated resources. Operators were willing to borrow at 53% per annum
even though they were earning only a 5% fee on early advances plus 10% commission on savings, because being
able to make advances to a substantial number of clients improved their reputation and attractiveness to new clients
(who pay an up-front membership fee). Another source of profits to operators is that clients who drop out before
completing 100 payments do not get their accumulated amounts refunded – ostensibly as a means of enforcing
savings discipline.
20
The accumulating type is usually larger; a 1993 survey found that they average 37, as against 12 for a typical
monthly rotating susu group.
21
Besides the impossibility of actually supervising hundreds of the mobile agents, the amounts of individual savings
at risk are fairly small (since they are accumulated only a month at a time; and since susu collectors typically put
their collections in commercial bank accounts).
17
There are eight regional susu collectors cooperative societies, which are grouped into the

national Ghana Co-operative Susu Collectors Association (GCSCA). Registered members
account for nearly a quarter of the estimated over 4,000 collectors nationwide, collecting an
average of US$15 a month from approximately 200,000 clients (GCSCA 2003).

The one type of susu institution that has come under formal regulation (apart from susu-
type products offered by licensed financial institutions) was the susu companies, whose
guarantee of loans of double the amounts saved, combined with mismanagement of funds, made
them unsustainable. Passage of the NBFI law essentially terminated this practice as a “semi-
formal” financial activity carried out by registered businesses, and required that they raise
sufficient minimum capital and become registered as an S&L (which Women’s World Banking
Ghana did for its susu scheme).

Some commercial banks have introduced savings products modeled after and advertised
as susu. Likewise, both Nsoatreman Rural Bank and First Allied S&L have a susu scheme in
which clients can borrow a multiple of their savings after three months, while a portion of the
savings (20-25%) is kept as security in a savings account (Chord 2000). Ahantaman Rural Bank
has a similar scheme, but works with clients in groups, and offers larger depositors the additional
incentive of participation in a raffle. In these cases, daily collection is carried out by salaried or
commissioned agents, whereas Citi S&L works primarily through susu club operators, with
services that include receiving their weekly collections, providing checks for clients who are
selected to receive their target sums in advance, and making loans to the operator. These
methodologies have been particularly effective in reaching lower-income brackets and women,
who constitute 65% to 80% of the clients of these susu schemes. Thus, the combination of
specialized categories of licensed financial institutions and traditional methodologies has
succeeded both in mobilizing savings from lower-income households and giving them access to
financial services that are part of the formal, supervised system.
22


In addition, some NGOs have utilized susu collectors to achieve their objectives, notably

Action Aid in the Northern and Upper East Regions to reach communities with little or no access
to formal financial institutions. In this scheme, community committees select susu collection
agents from the local community to work with credit assistants, both to mobilize savings from
the remote communities and to collect loan repayments (Quainoo 1997, p. 45).
Traders

A major component of rural finance in Ghana has always been the traders who operate
between producers in rural areas and urban markets, and often provide credit in the form of
inputs on supplier’s credit or an advance against future purchase of the crop. Traders do not
usually require collateral, but rather the agreement of the farmer to sell them the crop over an
agreed period; the implicit interest rate can be as much as 50% of the principal for the farming
season (Offei 1965, cited in Aryeetey 1994 p.16). Fish traders similarly use advances to lock in
their suppliers at relatively low prices. While these middlemen are often regarded as exploitative
in view of their monopsony power, for a large number of farmers and fishermen, access to

22
Introduction of the susu scheme by Nsoatreman helped accelerate the annual growth of its savings portfolio from
25% in 1998 to 71% in 1999 (Chord 2000).
18
financing depends heavily on the liquidity available from these traders – and hence, in turn, on
the ability of traders to access funds.
Other Informal Mechanisms

Apart from traders and moneylenders, loans from relatives, friends and neighbors
constitute the other main source of credit available to farmers (Aryeetey 1994, p.16). In
addition, the traditional nnoboa system of mutual assistance through labor exchange sometimes
includes financial arrangements (and indeed, may constitute an origin of the susu rotating
savings and credit system).
H. Government Credit Programs

The Government has launched a number of special credit schemes since 1989, usually at
subsidized rates, reaching very few people, and with extremely poor recovery rates. A partial
exception has been Enhancing Opportunities for Women in Development (ENOWID), which in
the early 1990s made over 3,500 relatively small loans (over 6 years) with a cumulative recovery
rate of 96% using funds from the Programme of Action to Mitigate the Social Costs of
Adjustment (PAMSCAD) (Quainoo 1997).
23
PAMSCAD, launched in 1989, reached an average
83% cumulative recovery by the end 1996 (after substantial efforts to improve recovery), but
only some 1,200 clients. None of the other four programs being administered by the National
Board for Small-Scale Industries (NBSSI) (which charges 20% interest) has reached a 70%
recovery rate or as many as 200 clients.
24
As a result, these “revolving funds” are depleting in
nominal as well as real terms, even without counting the substantial costs to Government of
operating them, with a negligible outreach averaging fewer than 60 loans a year (apart from
ENOWID).

The Government has also entered into microcredit through poverty alleviation programs
and the District Assembly Common Funds. While in some instances this has served to make
wholesale funds available to local RMFIs for on-lending, more commonly it has been perceived
and used as politically motivated “loans,” with negative consequences for repayment. The
government in 2001 came out with an Emergency Social Relief Project meant to provide US$57
million in business loans to the economically active poor at 20% interest rate over 2002-04.
Disbursements are made through RCBs, S&Ls and NGOs, who evaluate the beneficiaries. The
main threat to sustainable rural and micro finance from these government programs comes from
the negative effects on efforts of RMFIs to mobilize savings and to collect from borrowers,
whose willingness to repay typically is low when loans are known come from government or
donor funds at subsidized rates. A particular hazard for RMFIs that handle such funds is that
poor repayment may spill over to their own portfolio.

23
The reported recovery rate is not necessarily sustainable, depending on how it is measured and the term of the
loans. The program metamorphosed into an NGO (ENOWID Foundation) and expanded its clientele to 3,399
women in 1999, but with an arrears rate of 35%. Subsequent efforts brought reported arrears down to 2% in 2001
with 2,623 clients and operational sustainability of 64%.
24
The Developing Cottage Enterprise Project (1989), NBSSI Revolving Fund Scheme (1992), NBSSI/DED Credit
Scheme (1993), and NBSSI/NFED-Dev. Assistance (1994) (Quainoo 1997).