Although not as widespread and developed as in Latin America and Asia, microfinance in Africa has become a central tool for alleviating poverty and spurring economic development. With a financial sector that in regional comparison is already fairly well developed, Ghana’s microfinance sector is one of the most vibrant of the continent. Mixmarket (2011) lists $131.2 million of total loans, distributed among 358,717 active borrowers, for 2009. For the same year, 1.3 million privatelenders are estimated to hold in total $140.2 million in deposits in Ghana.
This report examines the microfinance institution (MFI) “Kraban Support Foundation” (KSF). This small organization, founded in 1996, serves as a case study for applying microfinance-adjusted analytical assessment tools. This is done from the perspective of a potential investor or donor of funds. The report is structured the following: First, we will give a brief overview of the microfinance operational environment in Ghana to lay the basis for the analysis. Secondly, we will present KSF with its history, mission, and current situation. This qualitative assessment will then be furthered by applying the “CAMEL” methodology which is tailored to microfinance institutions. By looking at capital adequacy, asset quality, management, earnings, and liquidity risk, we aim at providing a comprehensive picture of the MFI’s health despite the very limited data available. Furthermore, we attempt to complement the analysis by using Accion’s Social Indicators as far as information about KSF could be obtained. In a concluding summary, we will state which results the assessment yielded, and more importantly, what our investment decision as prospective investor or donor would be.
Operational Environment: Microfinance in Ghana
The conventional Ghanaian banking industry presents itself as fairly developed. It can be split into two distinct areas, Commercial/ Universal Banks and Rural/ Community Banks. There are 30 registered commercial and 135 rural banks in Ghana as at August 2010 (Bank of Ghana, 2010). Barclays Bank, Standard Chartered Bank and Ghana Commercial Bank (a privatized bank) have the largest market share but healthy competition from foreign banks, mainly from Nigeria, is present. The new regulation of the central bank – the Bank of Ghana - requires banks operating in the country to have a stated capital of not less than GH¢60 million (about US$43 million) (Allen, Otchere and Senbet, 2011, p.99).
With regards to microfinance, Ghana has on the one hand a long history of vibrant and active lending business for the “bottom of the pyramid” which, however, has developed in an ad-hoc way and is highly decentralized. In addition, many forms of informal finance persist in the country, often to the detriment of the borrowers. The sector is currently self-regulated quite effectively. The central bank does not have the resources to supervise the entire sector, although it is directing substantial resources toward a strengthened position (CGAP, 2010). In 2009, the Non-Banking Financial Institutions Act 774 (NBFI Act) has begun to be implemented. It came as a response to the discussion about regulating the informal savings services provided by “Susu Companies”, which sometimes lack the capacity to manage the deposits they take in. The new regulations shall regulate all microfinance activities and are intended to improve co-ordination in the sector. The new law expands the range of activities allowed to microfinance institutions (MFIs) to encourage innovation and development with expected positive changes. Also, all non-deposit-taking financial institutions are now subject to higher minimum capital requirements, which are likely to result in a round of consolidation among MFIs, as many of them are below that minimum rate (EIU, 2010, p. 54).
In general, Ghana’s financial sector still experiences a gap between demand and supply of financial services, despite reforms. Challenges to microfinance sector development occur in the areas of institutional arrangement, credit delivery and management, monitoring and reporting systems and consumer protection. Suggestions for an improvement of the situation include the clear definition of relationships and roles to improve service implementation and delivery, the establishment of a “Central Microfinance Fund” to provide lending and capacity building support, and the development of a national data bank (Opare-Djan and Apania, 2008).
Overview of the Kraban Support Foundation (KSF)
The Kraban Support Foundation (KSF) is a “development-oriented NGO with the aim of eradicating rural poverty through community education and rendering efficient and effective financial services that improve the livelihoods of clients in target communities” (mixmarket, 2011). For the long-term, Kraban’s vision is to be the leading financial non-governmental institution in Ghana by 2025. Its mission can be described as developing innovative strategies that enhance the capacity of vulnerable groups to operate independently and effectively in the informal sectors of the Ghanaian economy. Kraban is domestically oriented, with Ghana as the country of operational focused, and is hence headquartered in the capital Accra. It was established in 1996, and is special featured is as already explained the dual objective of giving out retail credit to clients, and to provide a poverty-related training and technical support for micro-enterprises.
The organization’s business can be described as mainly “village banking” based on the Grameen model. This means that KSF links the loans given out to deposit services, and usually it is women groups who borrow micro-credits. However, it is not the group itself that decides on the funding decision, which would be the case in a credit union type of MFI. Instead, KSF emphasizes that it rests solely within its own area of responsibility to decide about lending. In consequence, this means that in most cases the borrowing goes hand in hand with opening a deposit, as 7700 out of the 7781 borrowing people have a deposit. Also, one client can only have one deposit with KSF at a time.
In an internship report, it is explained how KSF goes into rural villages and starts by teaching women on the value of microfinance and establishing a women’s group. Once a group has been successfully formed, the group starts off by savings deposits, which are recorded at weekly meetings. Once the group achieves a certain consistency and credibility, they can recommend themselves for loan applications through the micro credit network (kiva, 2007).
Generally, Kraban appears to be one of the more popular microcredit NGO’s in Ghana. The institution has a slightly lower interest rate with an attractive, initial grace period on the first month’s repayment on the loan. Lastly, and more importantly, the additional pillar with the business and life skills training program “T.E.A.C.H.” (Training, Education and Credit for Health). This approach is successful, since it provides women with the “missing” educational and business skills that many could not receive when they were younger (kiva, 2007).KSF runs three offices in Ghana with a 10-people staff, managing around $1m of assets. It has 7781 active borrowers, of which almost 99% are female. The average loan balance per borrower amounts to $128, which equals ca. 20% of GDP/capita of the country, according to mixmarket estimates. For 2009, the institution reports a hefty negative profit margin of -52%, whereas in the years before it ran single-digit positive margins (mixmarket, 2011).
Assessment of KSF Using the CAMEL Methodology
In this part, we are going to evaluate KSF with the analytical framework abbreviated as “CAMEL”. The methodology originated in traditional assessment tools for measuring financial institutions, but was then adapted by ACCION to the specific microfinance environment. We proceed by examining step by step the five core indicators for an MFI’s analysis, namely capital adequacy, asset quality, management, earnings, and liquidity risk. By weighing each of the in total 21 factors, we are able to derive an overall balanced image of the positioning of the Kraban Support Foundation, and the results provide us with the possibility to issue recommendations for improvements to management. We quantify the performance through a rating of one to five assigned to each of the CAMEL’s 21 indicators and weighted accordingly. Important for us as the investor is also that we will come up with a rating of the financial health and performance, and identify risks which KSF is likely to face in the future.
1) Capital Adequacy:
CAMEL uses three measures to determine the capital adequacy of MFIs, namely leverage, the ability to raise equity, and adequacy of reserves. We start by looking at leverage first.
Most of KSF´s loan book is financed through its own equity if one goes by book value. As a result, it would seem that it has a very low leverage ratio. Leverage ratio in this case is defined as average equity divided by the risk weighted assets. The CAMEL methodology assigns weights to different assets on the balance sheet depending on their riskiness. For instance, cash is given a zero weight as it is at hand and there is no probability of not getting it back, whereas loans are given a 100% risk weightage as the probability of not recovering them is much higher.
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However if we were to add the adjustments made in 2008 and 2009 to equity, the picture looks completely different. Now it seems that the company is financing its U$$1.1mn asset book with only US$134,865 of equity. This means that it is leveraged approximately 8 times. The main purpose of looking at the capital of a financial institution is to see whether it has sufficient capital to weather significant losses (beyond its provisions). In this regard we feel that KSF has not sufficient capital to withstand significant losses in its loan portfolio, giving it a CAMEL score of 2.
Ability to Raise Equity
Given that KSF has effectively been cut off from receiving funds from kiva as a result of some issues that will be described later in more detail, raising equity will be increasingly difficult for the MFI. Furthermore with all the adjustments that need to be made to its accounts, it looks like KSF is burning money quite rapidly and therefore it needs to keep raising equity. As we feel it will not be easy for KSF to raise equity we give it a score of 2 in this category.
Adequacy of Reserves
Adequacy of reserves measures the ability of the microfinance institution to absorb potential losses on its loans book. Therefore, we need to look at the loan loss provisions and see if they are sufficient. Using data from Mixmarket (2011), we can see the proportion of the loan book overdue. We assume that, since no data is provided for loans over due after 90 days, that those loans are fully written off. For 2009, the actual loan loss provision (see table below for details) was US$57,413 against the CAMEL recommend provision of US$71,631, a deficiency of US$14,218. The ratio between the two is around 80% which give it an excellent score of 5.
2) Capital Adequacy:
Following capital adequacy, the CAMEL approach measures asset quality,its second larger category,through five ratings. In the compiled table below we see that, whilst the portion overdue over 30 days is high, it decreases significantly reduced between 30 and 90 days. The greater than 90 day overdue loans are much lower, which is a healthy sign, indicating that KSF has a more or less appropriate collection mechanism for over dues. Using the CAMEL Portfolio at Risk formula, we get a ratio between 6.1%-8.8% for 2007 until 2009, which consistently puts KSF into the range of score 3.
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With regards to the Loan Loss Rateof KSF, it yields a rate of close to 3% in 2009, which is substantially high. This has increased by over 100bps over 2008, which is cause for worries. Still, in the Accion scale the current loan loss rate (write-offs) still achieves a good score of 4.
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Portfolio Classification System. The CAMEL methodology gives a score of between 0 and 5 based on the information provided by the MFI about its loan portfolio. The best score is given to an institution which is transparent and classifies its portfolio both by age and by risk. Given that KSF has provided its portfolio classification only by ageing and not by risk, we have decided to give it a medium score of 3.
Fixed Assets. While in 2007, it looked like KSF had substantial fixed assets worth US$320,247, it appears as if most of this has been disposed in 2008. As per its 2009 balance sheet,KSF has fixed assets worth only 11,144. While there is significant other income of US$32,493 in 2009, there is no information as to whether KSF´s fixed assets were used to generated this. As such it is hard to measure the productivity of fixed assets. Thus, we do not include it in the overall score, as its weight of 1,5% would have been generally insignificant anyways. We allocated the 1.5% weight towards the loan-loss rate.
Infrastructure. As we researched, KSF for a long time did not have an own car, which impeded its productivity and ability to respond to client needs. Also, the IT environment is basic. Nonetheless, aware that we are in a developing country, we believe that the weaknesses in the MFI’s infrastructure are not too substantial, and thus we allocate a score of 3 in this category.
This area of analysis focuses on the governance of the institution by the board of directors, and the management of the institution by its senior management team. We will attempt to draw the most meaningful conclusions out of the very limited information on that area as possible. Acknowledging different management and leadership styles and cultural differences, we concentrate on features that ACCION regards as key to all successful MFIs: open channels of communication, and clear policies regarding risk metrics, including internal audit.
KSF is a very small MFI and hence, we doubt that a distinct board even exists, as there is also no information available that would suggest such a management structure. We were able to obtain the CV from the founder and CEO, Mr. Nana Opare-Djan. He holds a post-graduate degree in Public Administration after having studied politics and sociology. He has also benefitted from a Microfinance Training with the Boulder Institute of Microfinance held at the International Training Centre of the ILO, Turin, Italy (Wiser Earth, 2009). This background makes Mr. Opare-Djan a good teacher and trainer for the education programs of KSF. However, the financial expertise is not discernible, and unfortunately, information about further staff members and their background could not be found.
Based on our research, we allocate KSF a 3 on the 0-5 scale rating governance. This positioning reflects the lack of a visible strategy, the non-existence of an independent board, and the poor communication flows which, from an outside perspective give a very bad initial image of the MFI. On the other hand, personal experience reports of volunteers are generally very positive and make us belief that the internal management of KSF is not as bad as its external representation. As one report describes: “The Kraban staff, Nana, Kwame (alias “K”), Millicent, Mariam are exceptional. Each member I met has profound, intuitive capacity to listen and honor their clients; the client’s ‘voices’ were felt and heard. They are genuine. This deeper inner ‘connecting’ is what really touched me” (Kiva, 2007). We thus give this intermediate ranking to reconcile strengths and weaknesses of KSF according to what available data suggest.
Turning to human resources, a first glance at the number of employees suggests a rather volatile business with considerable staff fluctuation. For 2009, the number of employees went down by almost half, from 18 to 10 (mixmarket, 2011). We assume that no new employees were hired, but eight staff members laid off, which translates into a personnel retention rate of 55%. Moreover, we were not able to find any documents that would indicate a mission, strategy or objectives of human resource management. Neither could we identify effective training programs or the like, although for such a small organization it may be more understandable that training is done more in an ad-hoc and flexible manneraccording to what is needed. Again, the enthusiasm about the KSF workplace from temporary workers is a substantial argument for arguing that the end justifies the means. Given the deficiencies but overall functioning of KSF’s human resource management, we again give a 3 in this category.