The recent sharp fall in average deposit rates being charged by the microfinance institutions that survived the Bank of Ghana’s recent massive purge of that industry is most instructive. At its most basic level it reflects the improved prudence of the investing public who, having learnt from recent experience now consider the safety of their savings as at least as important as the interest yields they are offered.
But the lessons to be learnt extend far further.
To be sure, the fall in deposit rates offered by such institutions has not resulted in significantly lower lending rates yet as MFIs are using the opportunity to widen their interest margins to compensate for the smaller business volumes many of them are now having to cope with as depositors move their monies to perceived safer havens. Besides the banks themselves, who still account for most of the credit provided the private sector have not adjusted their interest rates downwards by much, on both the deposit and lending levels.
However, the recent trends in the MFI industry – and the expected replication of those trends in the savings and loans industry imminently – clearly illustrates the correlation between risk and reward, a relationship that up till now has been sadly lost on many of not most Ghanaian savers and retail scale investors. The bigger, safer MFIs offer lower yields to their customers but have proved that this makes for much safer havens than their cavalier counterparts who promised mouth-watering yields, but ultimately have failed to deliver on them beyond the short term.
Inevitably, this improvement in the attitudes of both lenders and borrowers has come at a cost; financial inclusion at the grassroots level has taken a big hit, as critics of the BoG’s strategy for resolving the insolvency crisis in the MFI industry have been quick to point out.
Nevertheless, this newspaper regards this as a necessary step backwards in order to take a sustainable journey forward. What is needed now is for financial intermediation industry regulators and equity investors to learn from the experiences of the various MFIs – the successes and the failures inclusive – and apply those lessons to expand the industry in a sustainable way, applying best practices.
Beyond the lessons learnt by depositors, potential borrowers have lessons to learn too, from the borrowing customers of the MFIs that have survived the recent purge. The most basic lesson is that financial prudence and accompanying good financial track record, coupled with general good business practices on a wider level, attract the financing of the best run, most financially solid MFIs – and indeed the other, bigger genres of financial intermediaries as well, including the commercial bank themselves – who offer the cheapest loans even as they attract the cheapest deposits with which to fund them.
The issue of lowering lending rates has been wrongly regarded for far too long in Ghana as strictly a problem to be solved by government and its financial intermediation industry regulators, rather than a problem to be solved by lowering risk in order to lower the rewards demanded by lenders. The falling interest rates in the MFI industry is clearly showing how the latter can ameliorate the problem, if not solve it altogether, without the former needing to institute bureaucratic solutions that are doomed to failure anyway.