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

Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana - IntroductionThe financial sector is a sector that utilizes productive resources to facilitate capital formation through the provision of a wide range of financial services to meet the different requirements of borrowers and lenders. Thus, the financial system plays a crucial role in mobilizing savings, and ensuring that these resources are allocated efficiently to productive sectors (Ang, 2007). In Ghana the financial system comprises formal, semi-formal and non-formal institutions that mobilize savings and grant loans to the public. The emergence of the informal financial system has become very crucial due to the inability of formal and traditional commercial banks to serve the wide range of needs of low income groups. In this regard and to serve the financial needs of the rural and urban poor, low income groups in society and micro-entrepreneurs, microfinance has been identified as a powerful way of serving the unserved, the under-served and reaching the unreached. Even though microfinance programmes have contributed immensely to poverty reduction among their clients as claimed by most authors, there remain significant challenges. While the provision of credit is by far the most important product of financial services, much progress has also been made by many MFIs offering a range of savings and insurance products, which has great potential for alleviating poverty and reducing vulnerability.
Despite the above conviction that microfinance is a powerful tool for reducing poverty, there remain several challenges in the sector. One of the biggest challenges facing the sector is default arising from loan delinquency. As registered legal financial institutions, MFIs have the legal right to prosecute defaulters and compel them to pay all outstanding loans. This process has some cost implications to the institutions. In doing this, institutions use ‘good money’ to chase ‘bad money’. In this paper good money refers to funds that the MFIs have in their coffers to process court actions against defaulters and ‘bad money’ refers outstanding loan balances. These outstanding loan balances are described as bad because one cannot measure with precision whether they will be retrieved or not even after court action. Bad loans more often than not generate ‘bad monies’ thus compelling MFIs to take court actions against defaulting clients with their ‘good monies’. Two main costs are associated with chasing bad monies: money cost and opportunity cost. The money involves the amount of money involved in taking defaulting clients to court including court fees, processing fees, transport and travelling expenses of staff to and fro court premises. The opportunity cost involves the time spent in chasing clients who have defaulted. Reading here
It is usually possible to estimate that after the institution has used good resources (such as monies in the safe) to follow-up bad loans; all efforts to retrieve them prove futile due to many factors. Some clients sensing danger in repayment may re-locate, change their addresses, and cannot be traced at all. Clients are compelled to re-locate in times of default and sensing dangers associated with their arrest. In connection with this, one of the main challenges facing MFIs in Ghana is that many clients give false information about themselves making it difficult for the institutions to chase them in times of default. It also appears that the traditional principle of ‘know your client’ (KYC) is not being followed well by many MFIs because they want more clients. In another development, it is also believed that since most clients are in the communities that these institutions operate, vital information about clients are ignored or taken for granted. Another prominent factor is high cost of loans which make it difficult for clients to pay the principal and accumulated interest on their loans. It is philosophical to conclude that at times, there are bad loans and not bad clients because some MFIs having the sole mission of making profits poach clients to take loans at extremely high interest rates. Bad loans refers to loans that are not properly screened before approval, loans given to clients just because institutions want to make their profits, as well as loans that carry high interest rates. One can therefore not blame clients who default because some MFIs just want to supply credit in order to make profits.