The Effect of Regulations on Performance of Microfinance Institutions in Promoting Small Business Growth in Ghana

Abstract

Microfinance institutions (MFIs) have emerged to provide financial services to the poor who were hitherto, excluded from the formal financial system. MFIs have pursued the objective of providing financial services to the poor through two different approaches: the welfarist approach and the institutional approach. The welfarist approach focuses on poverty alleviation by emphasizing the depth of outreach, i.e. reaching the very poor and vulnerable in society with microfinance products. The institutionalists, on the other hand, focus on institutional sustainability by pursuing financial self-sufficiency while serving significant numbers of the poor i.e. breadth of outreach. Despite differences in the two approaches, the performance of MFIs should be assessed on the extent to which they fulfil their common objective of meeting the financial needs of the poor. However, for MFIs to reach out to large numbers of the poor with financial services, their businesses should be conducted on sound operating principles. This requires that MFIs are regulated. Regulation is therefore, important to effective operation of MFIs but can limit their ability to reach the very poor with appropriate financial services. Up until recently, MFIs in Ghana were regulated by various bodies. The rural and community banks and savings and loan companies, regulated by the Bank of Ghana (BoG), had the most rigorous compliance requirements ensuring effective governance. In contrast "susu" operators, regulated by the Ghana National Association of "Susu" Collectors, had the least compliance requirements and the most weak governance structures. This study seeks to examine the effect of regulation on the performance of MFIs in promoting small business growth in Ghana. Small business provides an avenue for income generation by a large segment of the poor, many of whom do not have the qualifications and experiences to be employed in positions that generate sufficient income to meet their needs.