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

Data for the study comprises both secondary and primary data. The secondary data comprises financial reports of the selected MFIs. In addition structured questionnaires were used to collect information from selected MFIs in Ghana including Credit Unions (CUs), Rural and Community Banks (RCBs) and Savings and Loans Companies (S&Ls). In all 4 credit unions, 4 rural banks and 2 savings and loans companies were interviewed for the study. The institutions were selected from Central, Ashanti and Western Regions of Ghana. Selection of these institutions was done randomly and according to institutions that were prepared to give out the information for the study. The questionnaires captured information on outstanding loan balances, reasons for default among clients, management opinions on credit approval, board involvement or otherwise in loan approval. An examination of loan books was done to confirm information provided by the interviewees. A descriptive approach was used to analyze the data. For the sake of anonymity, the respondent institutions are to be held anonymous as the Ghanaian data protection law requires. In this paper therefore the names of the institutions are withheld for the sake of anonymity.
Clients default for several reasons. In this study loan officers were asked questions about their perceived level of reasons for client default (Table 3). With exception of lack of monitoring and late disbursal of loans, loan officers perceive that apart from management and board involvement, some of the causes of loan default among clients are: high interest rate, wrong use of loans, insufficient screening and less frequent repayment schedules. The factor that ranks first is wrong use of loans (65%). Whether someone influences the loan approval or not, as loans are misused they generate bad money. The second on the list is poor repayment schedules. For example, Armendariz and Morduch report that in Bangladesh microfinance contracts with less frequent repayment terms are associated with higher default among clients. This finding collaborates with the result current study (see table 3). Again, frequency of repayment is associated with client delinquency which is also a correlate of loan default among MFI clients. Loan officers perceive that less frequent repayment arrangements is a very strong factor (60.5%) in contributing to client default. Here too this finding is consistent with Rosenberg. Again the result confirms Rajan and Sarat that term of the loan agreement correlate with NPLs. The assumption is that if repayment is frequent, clients do not feel the pinch of the repayment since amounts involved are usually small. Traditionally, high interest rates have been identified as a major cause of loan default and for that reason; high interest rates can generate bad money.
Smith has noted that the costs of loan delinquencies would be felt by both the lenders and the borrowers. The lender has costs in delinquency situations, including lost interest, opportunity cost of principal, legal fees and related costs. For the borrower, the decision to default is a trade-off between the penalties in lost reputation from default versus the opportunity cost of forgoing investments due to working out the current loan. Table 3 shows the costs associated with default. The money cost is defined in terms of cost of court actions and is expressed as a percentage of amounts retrieved. On the average selected MFIs in Ghana spend 10.7% of their good money on court actions in their quest for chasing the bad money. This is consistent with Smith since all parties involved as per the study bear some costs.

Table-2: Selected African MFIs on Mix Market

Country No. of MFIs Loanportfolio


Activeborrowers Deposits(US$) Depositors Deposit /depositor


Loan per borrower (US$)
Ghana 54 131.8m 360,910 140.2m 1.3m 107.8 365.2
Kenya 26 1.1b 1.5m 1.2b 6.5m 923 733.3
Malawi 4 36.2m 119,385 31.5m 307,043 102.6 303.2
Egypt 16 216.9m 1.1m 1.1m 11,373 96.7 197.2
Gambia 19 87.6m 172,234 71.3m 516,887 137.9 508.6
Coted’Ivoire 11 62.7m 47,409 175.3m 973,213 1322.5 180.1
Nigeria 16 64.2m 503,196 41.4m 413,547 100.1 127.6
Niger 6 10.6m 48,894 4.5m 139,352 32.3 216.8
Benin 19 117.8m 143,473 104.9m 920,177 114 821.1
Togo 10 139.3m 152,736 160.6m 756,373 212.3 912.0
Cameroun 23 220.6m 205,117 340.1m 513,961 661.7 1075.5
Gabon 686,038 483 372 1420.4
Congo,Republic 4 72.4m 75,036 257,352 964.9
Liberia 3 2.3m 28,471 697,638 20,438 34.1 80.8
Uganda 25 313.6m 431,926 306.6m 1.7m 180.4 726.1
Zimbabwe 4 474,406 12,777 N/A N/A 37.1
Tanzania 13 591.3m 233,341 1.2b 357,105 3360.4 2534.1

Table-3: Level of perceived reasons for default

Other reasons why clients may default RANK Perceived Level
High Interest rate 3rd 58% 23% 19% 100%
Lack of monitoring 5th 40% 40% 20% 100%
Wrong use of Loans 1st 65% 30% 5% 100%
Late disbursal of Loans 6th 20% 25% 55% 100%
Insufficient loan screening 4th 54% 40% 10% 100%
Less frequent repayment 2nd 60.5% 30% 9.5% 100%