UNIVERSITY OF EDUCATION, WINNEBA

SCHOOL OF BUSINESS

DEPARTMENT OF APPLIED FINANCE AND POLICY MANAGEMENT

SECOND SEMESTER 2022/2023 ACADEMIC YEAR

BAF 482 MICROFINANCE FINANCE AND RURAL BANKING

INTRODUCTION TO MICROFINANCE

HAJIA RAMATU USSIF (Ph.D)

 PRESENTATION OUTLINE
 Meaning of Microfinance
 Evolution/History of Microfinance
 GHAMFIN
 The need for Microfinance
 Benefits of Microfinance
 Challenges Facing Microfinance
 Factors that Determine MFI Success and Sustainability
 MFI Lending Models
 MFI Credit Risk Management Mechanism
 Reference

BAF 482 Lecture 1

 Microfinance Meaning
 Microfinance refers to the provision of financial services to low-income clients
and microenterprises that often do not have access to formal banking services.

 These financial services include microcredit, micro-savings, micro-insurance

and funds transfer services.

BAF 482 Lecture 1

 Microfinance Meaning

 Micro-finance is not limited just to the provision of credit.

 Provides financial intermediation, and social intermediation services, including

training in business development, management, financial literacy, vocational
skills as well as provision of relevant information to their clients.

BAF 482 Lecture 1

 Evolution of Microfinance in Ghana

The concept of microfinance is not new in Ghana.

- There has always been the tradition of people saving and/or taking small loans from individuals and
groups within the context of self-help to start businesses or farming ventures. 

 E.g. available evidence suggests that the first credit union in Africa was established in
Northern Ghana in 1955 by Canadian Catholic missionaries.
 However, Susu, which is one of the microfinance schemes in Ghana, is thought to have
originated from Nigeria and spread to Ghana in the early twentieth century
 Evolution of Microfinance
 It is important to note that credit associations and lending
cooperatives have been around hundreds of years.

 The pioneering of modern microfinance is often credited to

Mohammad Yunus.

 Professor Yunus in 1976 on a trip to a village in Bangladesh known

as Jobra used his personal money to give loans to a group of
women some of whom dealt in bamboo furniture.
 Evolution of Microfinance

After been convinced that loans to the poorest of the poor was viable
he formed the Grameen (Village) Bank in 1983.

Yunus and the Grameen Bank for their contribution in leading the
microfinance revolution were awarded the Nobel Peace Prize in 2006.

BAF 482 Lecture 1

 Evolution of Microfinance

•Over the years, the microfinance sector has thrived and evolved into its current
state owing to the various financial sector policies and programmes (Reforms)
Reforms
undertaken by different governments since independence.
- Among these are:
 Provision of subsidized credits in the 1950s;
 Establishment of the Agricultural Development Bank in 1965 specifically to address the
financial needs of the fisheries and agricultural sector;
 Establishment of Rural and Community Banks (RCBs), and the introduction of regulations
such as commercial banks being required to set aside 20% of total portfolio, to promote
lending to agriculture and small scale industries in the 1970s and early 1980s;

BAF 482 Lecture 1

 Evolution of Microfinance

- Among these are (cont…):

 Shifting from a restrictive financial sector regime to a liberalized regime in 1986;

 Promulgation of PNDC Law 328 in 1991 to allow the establishment of different

categories of non-bank financial institutions, including savings and loans
companies, and credit unions.

BAF 482 Lecture 1

 Evolution of the Microfinance Sub-Sector in Ghana
• The policies have led to the emergence of three broad categories of
microfinance institutions.
- These are:
• Formal suppliers
• E.g. savings and loans companies, rural and community banks, as well as some
development and commercial banks;
• Semi-formal suppliers
• E.g. credit unions, financial non-governmental organizations (FNGOs), and
cooperatives;
• Informal suppliers
• E.g. susu collectors and clubs, rotating and accumulating savings and credit
associations (ROSCAs and ASCAs), traders, moneylenders and other individuals.

BAF 482 Lecture 1

 GHAMFIN

• Ghana Microfinance Institutions Network (GHAMFIN)

• A network of Microfinance Associations and their member institutions engaged in the
provision of microfinance services.
• It has associate and honorary members who provide support services to the industry.

• It comprises a diverse range of Microfinance sector actors.

• Banks and Non-Banking Institutions.

BAF 482 Lecture 1

 The Need for Microfinance

 Inability of the poor to access financing from the formal financial institutions

 High level of illiteracy rate and the lack of expertise on the part of conventional
financial institutions in targeting such clients.

BAF 482 Lecture 1

 The Need for Microfinance

 Banks consider SMEs to have high risk

 The population density is very low in most rural areas causing high
transaction costs

 Lack of collateral by MFI clients

BAF 482 Lecture 1

 Benefits of Microfinance

Reduction of poverty through the creation of job opportunities for the poor
Helps very poor households meet basic needs and protect against risks.
Improvement in education levels among the poor
Promotion of gender equality and women’s empowerment
Reduction of child mortality, improved maternal health and nutrition,
housing and health

BAF 482 Lecture 1

 Challenges Facing Microfinance

 The lack of institutional and human capacity

 Inadequate infrastructural support

 High risk involved in the operations of MFIs

 Inadequate funding for MFI activities

 The current capacity of various MFIs to undertake monitoring and evaluation of

programmes is inadequate.

 Weak legal,
BAF 482supervisory
Lecture 1 and regulatory framework of microfinance institutions
 Factors that Determine MFI Success and Sustainability

Quality management
Attracting and retaining talented staff
Innovative products and services
Less reliance on subsidies
Sound financial management and enterprise risk management
Diversified clientele base
Prudential regulation by MFI regulators
 MFI Lending Models

Group based lending

Village banking

Individual banking

BAF 482 Lecture 1

 MFI Credit Risk Management Mechanisms

 Information asymmetries also affect the market for microfinance loans.

• Adverse selection
• Moral hazard
 Agency issues can be seen in twofold:
• Agency issues relating to the staff of the MFI
• Agency issues relating to the clients of the MFI.

BAF 482 Lecture 1

 MFI Credit Risk Management Mechanisms

 Risk management methods include:

• Group based lending
• Collateral
• Graduated loan schemes
• Frequent collection of loan instalments (weekly) and short loan maturities
• Compulsory savings
• Guarantors and referees may be needed for loan applications
• Collecting information
BAF 482 Lecture 1 on clients (eg. KYC procedures)
 Challenges Confronting Banks in the MF Market

 Unsuitable methodologies – individual lending and collateral requirement.

 Profit oriented and do not have high social concerns.

 Higher transaction costs compared to ordinary banking.

 Inappropriate and inadequate regulation – MFIs require differential regulation.

 Exposure to significant credit risks

 Experienced personnel
BAF 482 Lecture 1 and incentive schemes
 REFERENCES
 Abor, J. Y. (2017), Entrepreneurial Finance for MSMEs: A Managerial Approach for Developing Markets, Palgrave Macmillan, UK.
 Adelman, P. J. & Marks, A. M. (2009), Entrepreneurial Finance, Fifth Edition, Pearson Prentice Hall, New Jersey.
 Armendariz de A. and Morduch, J. (2005), The Economics of Microfinance, Massachusetts Institute of Technology, Cambridge.
 Smith, J. K., Smith, R. L. & Bliss, R. T. (2011), Entrepreneurial Finance: Strategy, Valuation, and Deal Structure, Stanford University Press,
California.
 Cornwall, J. R., Vang, D. O., and Hartman, J. M. (2004), Entrepreneurial Financial Management: An Applied Approach, Prentice Hall, Upper
Saddle River.
 Hughts, A., and Storey, D. J., (1994), Finance and the Small Firm (Small Business Series).
 Muzyka, D. F., and Birley, M. S., (2000), Financial Times Mastering Entrepreneurship, FT Prentice Hall, London.

MDEF 813 Lecture Four

END OF THE LECTURE

BBAd 123 Lecture Two