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

Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana - ResultsOn the average, it costs an MFI GHS 3,863.3 (equivalent of US $2476.47) to process court actions against defaulters. The average loan portfolio aged more than one year is estimated at 104,409.78 (equivalent of US$ 66,929.35) meaning MFIs in Ghana have high nonperforming loans (NPLs) on their balance sheet. It is also interesting to note that on the average 52 clients were sent to court between 20062010. These were clients whose loans were influenced in one way or the other by a board member, CEO or a key staff of the organization. Another cost to the MFIs is the unpaid amount (principal plus accrued interest) that remains with the clients. Even though defaulters may be ordered by the courts to pay, the court cannot guarantee the full payment of all outstanding loans. It has been observed from the study that clients only pay less than 50% of the bad loans after which they relocate or cannot be located at all. Thus the second part (relocation) of the cost to the bank is even greater than the cost of court actions. The third aspect of cost to MFIs is the time spent in chasing clients for court actions. It takes on the average 30 days for the court to give hearing to a client. Even though this cannot be quantified in monetary terms, the opportunity cost is high. A member of staff who follows the court actions could have worked at the office instead of chasing bad money and attending to court to represent the bank since most MFIs do not have lawyers. Even when there are lawyers, a staff still has to represent the MFI as the secondary prosecutor to provide evidence that the clients owe the institution. Going by the Basel Accord (Basel Committee, 2003) therefore means that irrespective of the nature and size of the organization, full provision should be made for all doubtful debts.
Board, management and staff involvement-right or wrong?
Fiducially, it is not right for the board to be involved in loan application and disbursement processes even though the board has the right to approve certain thresholds of loans. The board owes a duty of care to shareholders and they are to protect innocent depositors from loss of their hard earned savings. In the same vein, management are entrusted with owners’ resources and they are to make sure that loans go into the right hands for the sake of timely repayment. Table 4 shows the level of board, management and staff involvement in granting loans in selected MFIs in Ghana. The table also shows whether or not there exists code of directors on loans for directors and management. Within eight of the MFIs there is management, staff and board influence in loans to clients. The involvement comes as a result of blood relations. This practice is against ethics of business and does not make loan officers independent. The influence starts at the loan initiation process. In another development, some management and key staff commented that their remuneration does not commensurate their effort. They therefore push clients’ loans to receive ‘tips’. The practice in the Ghanaian banking sector has been ‘help me to get the loan for a reward’. In most cases when client’s loan is approved, the officer who assisted in getting the loan is promised 10% which is unethical. This is usually referred to as ‘kick-back’. This is common not only in banks and MFIs but even in most government institutions where contracts are awarded to contractors for the execution of government projects.

Table-4: Overdue loans, court actions and amount retrieved 2006-2010

MFIs No. of clients sent to court Overdue loans (GHS)* % of loan aged>1year Cost ofcourtactions

(CoCA)

GHS*

Amountretrieved(AR)

GHS*

(CoCA/AR)%
RB1 165 9,026,037.77 (451,301.9)5 9,499 96,360 9.9
RB2 21 1,761,574.36 (140,925.7)8 2,520 26,800 9.4
CU1 20 177,513.85 (44,378.5)25 5,889 32,298.2 18.2
CU2 N/A 56,062.57 (11,212.5)20 N/A N/A N/A
RB3 N/A N/A N/A N/A N/A N/A
CU3 N/A N/A N/A N/A N/A N/A
RB4 N/A N/A N/A N/A N/A N/A
CU4 31 36,916.95 (18,458.48)50 1,282 15,274.5 8.4
SL1 37 49,520.69 (19,808.28)40 2,790 19,339.0 14.4
SL2 56 89,568.0 (44,784.0)50 1,200 32,000.0 3.75
Average 52 1,574,240.05 (104,409.78)24 3,863.3 37,011.95 10.7