Microfinance companies, a major challenge for financial sector – Prof. Kwesi Botchway

Chairman of National Development Planning Commission (NDPC) is warning that microfinance institutions in the country could pose a major challenge for the entire financial sector if not better supervised.

The crisis bedeviling the microfinance sector, which has seen thousands of customers lose millions of their deposits Professor Kwesi Botchway said could eventually impact on the banking sector negatively.

He is, therefore, warning for urgent steps to be taken by the Bank of Ghana (BoG), against the backdrop that the entire system thrives on trust with customers.

Speaking with JOY BUSINESS the Former Finance Minister said stringent monitoring is critical to averting a possible spill-over.

“Microfinance institutions do need to be better supervised. They have expanded exponentially, this year were numbered 555 institutions.

“They can create problems for the entire banking system by weakening trust both in themselves and worse by extension the banking system generally,” he said.

He cited Tim Geithner, the Treasury Secretary in the United States who at the height of the financial crisis in 2008 and thereafter said in his ‘Stress Test’ book that financial systems are built on belief explaining the derivation of the ‘credit’ from the latin meaning ‘for believe’.

“Geithner says confidence is a very fragile thing and once it evacuates it is very difficult to bring it back, but as bankers, it is something you learn at your mother’s knee and we take it for granted,” Prof. Botchwey added.

Meanwhile, the Chief Executive of Dalex Finance, Ken Thompson, is advocating a reduction in Treasury Bill Rates in the country to enable Small and Medium Enterprises (SMEs) access cheaper credit for growth.

The current rate at which banks borrow to government he believes is stifling credit extension to SMEs.

“Very few businesses can pay an interest of 70 percent and survive. If you take even us we borrow to on-lend at 31 percent so we do a multiple of 2.5 but a bank may take your money at 3 percent if you are lucky and they do 45 percent,” he explained.

He said the cost of credit is expensive with some people paying as much as over 100 percent noting that Ghana has one of the highest rates of interest in the world.

Mr Thompson bemoaned the rates at which they are borrowing adding “…it is very very difficult to do business. For us, the policy rate doesn’t really help us, being a treasury bill rate.”

He explained that if the treasury bill rate comes down the borrowing rate would also come down which will also make the lending rate to come down.

The Dalex Finance boss doubts that in the short-medium term, this would happen because “the government needs to borrow until maybe the projects they have invested in starts to yield fruits, but I doubt it very much.”

Source: Ghana| Myjoyonline.com | Kuuku Abban | Joy Business