Franklin Belnye

Financial Inclusion and Regulatory Policy:
The Case of Ghana’s Informal and
Semiformal Financial Institutions

Fletcher School Leadership Program in Financial Inclusion:
Ghana Policy Memo

There is some consensus that a broad-based financial sector can contribute to eco-
nomic development and poverty alleviation (United Nations, 2005). Access to
financial services provides people with the opportunity to manage their risks,
broaden their menu of choices, and smooth their consumption patterns. This pro-
motes development, thereby contributing to poverty reduction. This raises con-
cern for a country such as Ghana, which has a fairly well-diversified banking and
financial system, and yet relatively low financial inclusion. The FinScope Ghana
survey of 2010 (FinMark Trust, 2010) indicates that only 56 percent of the adult
population is financially served and 44 percent is financially excluded. Among the
financially served, as much as 15 percent is served only by informal financial insti-
tutions.

Ainsi, the central bank’s financial inclusion efforts, including the creation of
rural and community banks, as well as savings and loan companies to help pro-
mote financial access for the rural folk and urban poor, have positively impacted
access to financial services. Néanmoins, much still remains to be done. The pro-
liferation of a new layer of financial intermediaries below rural and community
banks and savings and loans companies, which are enjoying growing patronage, est
evidence that financial access remains a challenge.

PROBLEM STATEMENT

The recent emergence of a new wave of unregulated informal and semiformal
financial intermediaries, comprising individual Susu collectors,1 Susu companies,

Franklin Belnye is Assistant Director and Deputy Head of the Banking Supervision
Department for the Bank of Ghana. With the exception of the policy documents quot-
ed and cited in this memo, the views expressed and the conclusions reached are those
of the author and not of the Bank of Ghana as a corporate entity.

This policy memo was initially written for the Fletcher School Leadership Program in
Financial Inclusion, where Franklin Belnye was a Fellow in 2011.

© 2012 Franklin Belnye
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money lenders, financial NGOs, and financial service companies, which are osten-
sibly catering to the financial service needs of the lower echelons of the financial
pyramid, presents both opportunities and challenges.

While the FinScope survey indicates an important role for informal financial
services providers in financial service delivery to the poor and the marginalized,
operations of such individuals and entities often pose a number of risks to patrons.
These risks, if not addressed, can threaten confidence in the financial system. Apart
from occasional reports of companies going bust or proprietors running away with
depositors’ funds, there are concerns that such providers are levying usurious lend-
ing rates and/or using unorthodox lending and recovery practices, which creates a
sense of insecurity among operators and patrons.

This policy memo explores ways of achieving a cost-effective system of super-
vision that promotes the orderly growth and integration of such intermediaries
into the formal financial system while protecting patrons from fraud and other
malfeasance.

ANALYSIS

Statistics on providers in this space. The Ghana Cooperative Susu Collectors
Association (GCSCA) boasts a membership exceeding 1,500 collectors country-
wide. This number excludes a number of freelance collectors that are not affiliated
with the GCSCA. Information available from the Ghana Police Service identifies
160 individuals, enterprises, and companies licensed to carry on money-lending
opérations. While the numbers of Susu companies and financial service providers
are less certain, they probably number about 50 such entities. In terms of deposit
mobilization, it is estimated that they intermediate about GH¢50-60 million
(equivalent to US$30-40 million), which is significant, given the segment of the
market covered.

Variety of institutions in this space . There are a variety of players in this intermedi-
ary space. They range from individual Susu collectors and money lenders, Susu
companies, financial services providers (or mini savings and loan companies), et
financial NGOs, most of which are companies limited by guarantee. The variety of
institutions calls for a tiered approach to regulation and supervision. Tiered regu-
lation implies that regulation should be differentiated and suited to each particu-
lar segment of this mixed market.

Criticality of their role in increasing access to financial services. Although Ghana has
witnessed an expansion in the bank branch network over the last few years, depuis
sous 400 dans 2005 to over 700 at the end of June 2011, these remain concentrated
in the major cities and urban centers and relatively wealthier southern parts of the
country. En outre, their flashy swinging glass doors and suit-clad staff remain
intimidating to both the urban and rural poor. Informal financial intermediaries
like those being described remain attractive, and sometimes are the only ones
available in some localities. Introducing some formality into their operations and

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Financial Inclusion and Regulatory Policy

recognizing their status and role can enhance confidence in them as intermedi-
aries, and thereby expand access to financial services.

Problems brought up in the past: Sudden collapse/disappearance, undue risk to
patrons, “illegality,” etc. There have been a number of incidences of the sudden col-
lapse and disappearance of Susu companies and financial service providers, souvent
with catchy headlines in the print media that imply inaction or negligence on the
part of the Bank of Ghana, the institution entrusted with regulation of deposit and
credit-granting activities. Within a space of one month, three such incidences were
reported in one region, involving about GH¢150,000 of savings. Shortly after,
another case was reported in the Afienya area (Accra region), where a collector
bolted with GH¢74,000 of depositors’ funds. These incidences arise principally
because of imprudent use of mobilized resources and reflect a lack of expertise on
the part of the collectors. These developments not only cost patrons their hard-
earned savings, but also hurt confidence in the wider financial system.

Past response of the central bank. Dans le passé, the Bank of Ghana took the position
that these institutions were insignificant relative to the wider financial sector and
therefore did not pose any risks to the financial system. In addition, regulating
such small-scale operators was thought to be costly and a waste of scarce supervi-
sory resources. Cependant, as the spate of reported collapses increased and the head-
lines became rampant, the bank moved in 2008 to close down a number of oper-
ations countrywide. This attracted some public outcry, including from political
figures. The bank responded to this by relaxing its stance and began to look at ways
of installing a cost-effective system of regulation and supervision.

Rationale for regulation. Regulation is necessary not only to restrict entry exclusive-
ly to competent persons and entities, but also to ensure orderly exit. It is also
appropriate that regulations address permissible activities and the appropriate
level of capital for operations and risk mitigation. Regulations should also put in
place a system of prudential reporting to the regulator to ensure adequate data for
analysis and policymaking. That way, sanity could be restored to the sector in a
cost-effective way while allowing innovation for financial inclusion. Regulations
should seek to provide a transition path from informality to formality, thus allow-
ing bigger operators to incorporate or register a business name while still allowing
individuals to operate as Susu collectors or money lenders, provided they associate
with an umbrella association for purposes of sharing best practices and collating
data on operations.

Proportionality principle. The challenge that arises is one of proportionality; comment
to ensure that regulation and supervision are not so burdensome as to drive oper-
ators underground or kill initiatives, or so demanding of regulatory resources as to
outweigh the benefits of extending regulatory oversight to the sector. The solution
can be found in a system of “tiered regulation,” whereby the bigger and systemical-
ly important operators are subject to direct regulation and supervision by the Bank
of Ghana, while the smaller ones are subject to indirect supervision through self-
regulatory umbrella associations. The central bank could also promote the forma-

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tion of umbrella associations for the different types of institutions to serve as a
platform for information exchange, good practice dissemination, and the exertion
of some form of peer pressure on their membership to ensure good conduct.

OPTIONS FOR REGULATION

1. Maintain the status quo. This is always a default option—let things stay as they
sont. The risk is that we have to live with the occasional failures and the bad press
for the central bank. It will also deny the central bank access to good data and
information on the contribution of that sector to financial intermediation. As a
nation, we could lose the benefit of actually harnessing the potential of these oper-
ators to achieve and expand financial inclusion.

2. Close down all such “illegal” operations. The central bank is vested with power to
“police” the financial system and can therefore order the immediate closure of
operations that it determines to be “illegal” or “unauthorized.” Indeed, this has
been done before (dans 2008) and it resulted in a public outcry, including complaints
from politicians who thought the central bank was unnecessarily high-handed in
its treatment of their constituents. That option may therefore not be appropriate,
especially as we approach another election year in 2012. Besides, without continu-
ous monitoring and closures, such institutions resurface after a while and therefore
defeat the whole exercise. This option also eliminates the potential benefit of
expanding financial inclusion through the services that these institutions provide.

3. Establish a tiered system of regulation. A third policy choice is to put in place a
system of regulation and supervision commensurate with the risks posed by these
institutions and operators. This approach avoids the backlash associated with
doing nothing and/or outright closure of institutions, although it comes with chal-
lenges. It also allows a nurturing of these institutions as instruments for financial
inclusion, while also providing a transition route to both formality and upgrading
into the formal sector. Given the variety in the size, scope, and mode of operations
of the players, designing a suitable regulatory system is challenging. The solution
is to divide institutions into those that can be directly supervised by the central
bank and those that should be supervised indirectly through self-regulating
umbrella associations.

Direct regulation of bigger players. In order to maximize efficiency in the use of
supervisory resources, it is appropriate to focus supervisors’ attention on the big-
ger players in this space. The collection of data on balance sheet size, loan portfo-
lio, and other key parameters will assist in stratifying all players by size and scale of
opérations. Basé sur ceci, those that meet a minimum threshold can be subject to
direct supervision through rules and guidelines that define minimum capital
requirements, permissible activities, governance structure, and prudential report-
ing, entre autres. A dedicated unit within the Banking Supervision Department
that is staffed with suitably qualified individuals could be made responsible for
their oversight.

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Indirect regulation: Promotion of self-regulating umbrella organizations. For small
players, such as the individual Susu collectors dotted all over the country, direct
regulation and supervision may be burdensome and not cost-effective. The obvi-
ous option would be to encourage all such operators to belong to an umbrella
association that establishes some minimum operating norms for compliance by all
members, with the approval of Bank of Ghana. Such an association already exists
for Susu collectors, and extending the same to money lenders or financial service
providers below the threshold would be appropriate. The rationale is to provide a
forum for members to learn good practice and for the regulator to interact with
the widely dispersed members through the leadership of the association. Le
umbrella associations could be supported with capacity-building for their leader-
ship and members, reconnaissance, and also access to non-lending funds, as incentives
to get individual operators to take interest in belonging to these associations.

RECOMMENDATION

The third option, which is to establish a tiered system of regulation, appears to be
the best choice under the circumstances, as it is supportive of financial inclusion,
provides for an orderly operation and development of the sector, and affords the
Bank of Ghana the opportunity to discharge its mandate in a cost-effective man-
ner.

IMPLEMENTATION PROCESS

Initially, a unit dedicated to the supervision of microfinance institutions, manned
by ten staff, was set up within the banking supervision function. This was followed
by the development of rules and guidelines and licensing requirements, lequel
were discussed with all stakeholders before being finalized for adoption and imple-
mentation.

The draft rules and guidelines were first discussed with top management in the
Bank of Ghana and the board of directors, and then presented at stakeholder meet-
ings in Accra and Kumasi, to which operators in the microfinance space were invit-
éd. Staff of the Bank of Ghana also made presentations to umbrella associations
separately, and aspects of the guidelines were clarified. After the stakeholder meet-
ings, the guidelines were finalized and published in mid-July 2011, followed by a
transition period of six months in which all operators were required to either com-
plete or start the licensing process, otherwise their operations would be deemed
illegal and subject to outright closure.

For the purposes of the regulation and supervision, microfinance activity was

divided into four tiers:
• Tier 1 comprises savings and loans companies, finance houses, and rural and
community banks; these are already regulated under the Banking Act of 2004
• Tier 2 comprises Susu companies and other entities engaged in financial servic-

es that involve deposit-taking, credit extension, or both

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• Tier 3 comprises money lenders (who are not deposit-taking) and financial
NGOs, which are companies limited by guarantee and non-deposit taking
• Tier 4 includes all individual Susu collectors and individual money lenders, comme

well as individuals trading with a business name but not incorporated; this cat-
egory will be regulated through an umbrella organization, such as the Ghana
Cooperative Susu Collectors Association

Subsequent to the publication of the rules and guidelines, the Bank of Ghana
has received support from Responsible Finance, a German initiative, to build the
capacity of umbrella organizations and enable the Bank of Ghana to achieve its
supervisory objectives in the microfinance sector.

1. Susu is a traditional methodology of savings with several variants, the most common of which is
where an individual known in the community collects periodic savings from other individuals on
the understanding that the total savings will be returned at the end of the specified period, less a
commission of a day’s savings. In other variants, people may agree to contribute a specified
amount and give the total to one member of the group, repeating same by rotation till every mem-
ber is served and the cycle begun again. In this memo we refer to the first type, where individuals,
business enterprises, and companies undertake this activity using the methodology.

Les références
FinMark Trust, FinScope Ghana, 2010
United Nations, Building Inclusive Financial Systems, 2006.

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