Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana – Conclusion and Recommendations

Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana - Conclusion and RecommendationsThe paper examines some of instances that make MFIs generate ‘bad money’ and the rationale behind using ‘good money’ to chase ‘bad money’. Data for the study is obtained by interviewing CEOs and credit officers of selected MFIs. An examination of MFIs loan books is done to confirm information provided by the interviewees. The paper concludes that the use of ‘good money’ for chasing ‘bad money’ is unprofitable and contaminates the entire portfolio of MFIs. Again, improper screening of loan applications also contributes to loan default. It is also concluded that management and board involvement in loan disbursement has serious negative implications for loan repayment and recovery. This can contribute to high level of non-performing loans (NPLs) on the balance sheet of MFIs.
Without board or management involvement, clients are likely to default. Prominent among the causes are wrong use of loans, high interest rates, less frequent repayment, and lack of monitoring activities from the MFIs. It is recommended that board and management need to price (realistic rates) loans that will not hurt clients because poor clients might be insensitive to high interest rates but might be sensitive to repayment which will produce bad money and NPLs of MFIs balance sheet. Flexible repayments schedules can reduce bad monies since they give clients some breathing space. Among poor clients, repayment can be on daily basis in small amounts since clients will not feel the payment. This can be done through the susu system.
It is obvious that MFIs have debt collection problems or they are incapable of collecting debts that go bad. It is recommended that it will be more profitable to sell outstanding debts to debt collection agencies at a fee. Instead of incurring on the average cost of 10% in enforcing legal actions to retrieve bad loans, it will be more economical to sell these debts to collection agencies at a fee less than 10% of monies retrieved. This proposal is consistent with Berger and DeYoung hypothesis. There is also the need to re-emphasize training, monitoring and evaluation of MFI clients in order to make good use of loans contracted since aside the influence form either board or management, clients themselves might not use the resources well.
Instead of the board influencing loans that go to clients, there is the need to strengthen the board’s capacity to facilitate provision of up-to-date loan repayment statements to loanees and enable early detection of potential slow loanees and defaulters. This will facilitate appropriate action including, follow-up, counseling or serving demand notices to potential defaulters. There is the need to document code of ethics for the board and management with regards to loans. This will ensure that neither the board nor management get involved in what they are not supposed to do. This will ensure the protection of deposits and sound banking practices. There should be a high level of trust between board members and that board members should be ethical and have high level integrity. Better executive remuneration is one more mechanism that can be refined to improve corporate and management governance.