The enactment of Non-bank Financial Institution Act, 2008, Act 774 into law, was an auspicious period in Ghana’s economic history which was characterized by a medley of policy packages leaning towards an expansionary tilt.

The Act, providing a clear framework for prudential supervision and market discipline, proved insufficient years later, as it served as a minimum threshold for regulating an increasingly complex sector.

To help decentralize the regulatory approach, a rules-based model that was responsive to the specific nuances of each sub-sector was introduced to help standardize activities. In proffering a rationale, the introductory text to the Rules state, that the new regulatory approach was being cautiously undertaken “…so as not to unnecessarily stifle the operations and development of MFIs…”

Suffice to say, two overarching principles were at play in shaping the regulatory framework that governs the MFI sector today; gradualism and proportionality. After almost a decade and 347 license revocations later, fresh questions about the philosophical underpinnings of Ghana’s MFIs regulatory model seem justified. The question then is: Has the principle of proportionality worked in realizing the stated policy outcomes?

Proportionality and the Business Rules

The principle of proportionality encapsulates the basic idea that any reaction to an action, or any response to stimuli, must be commensurate in ways that is deemed to be intuitively reasonable. As the saying goes, you don’t “kill an ant with a sledge hammer”. The application of this principle cuts cross several fields and disciplines; law, ethics, finance, etc.

In risk management, it may express itself as watered-down mitigation measures designed in response to low risk events or situations. Within the context of a risk-based regulatory model, that kind of simplistic approach could get tricky.

Take Tier 4 micro-credit sub-sector for instance – Rule 11(3) of the Business Rules prohibits Tier 4 operators from taking deposits from the public. As a result this sub-category of MFIs can only rely on own funds and market borrowings to finance operating assets. Additionally, Tier 4 operators per the regulation are required to register under the Business Names Act, 1962, Act 151, as sole proprietors, with no minimum capital requirement.

The confluence of these three variables; sole proprietorship structure, non-deposit-taking license and debt-only capital structure, lowers the risk that Tier 4 operators pose to the entire financial system. Considered from a risk-based regulatory perspective, the exposure is low. There are three countervailing arguments to this reasoning.

First, a direct corollary of this low risk classification is the lowering of some essential corporate governance requirements for Tier 4 operators. Case in point is Rule 21(4), which mandates the formation of an Advisory Committee, akin to board of directors for limited liability concerns.

In cases where there is compliance with this rule, it is tokenistic at best, and in cases of non-compliance, the same Guidelines (see Rule 21(4) (ii)) provide what appears to be a cop-out, effectively undermining the policy intent of Rule (21(4).

But this is hardly surprising, because foundational principle shrouded in the agency theory of corporate governance as established in Berle and Means (1932) is absent. Boards are designed to represent the interest of shareholders (or stakeholders) and clothed with powers to exercise executive oversight.

In this case, the ‘board’ is only advisory and has no real ‘skin in the game’. The implications for risk management and financial management is dire and could be felt in areas such as meetings (see Rule 21(5)), internal controls (see Rule 33(2)), audit (see Rule 25(1)) and prudential reporting (Rule 52), to name a few.

Summary and Recommendations

The principle of proportionality which has shaped regulatory response to issues in the MFI sector has not had demonstrable positive impact on corporate governance and risk management in the sector.

Regulatory inconsistences has added to the already complex dynamics in the MFI sector, particularly in tiers with non-deposit taking license. There is a need for harmonization and realignment of policy approaches with consensus in the corporate governance literature. 

Here are some recommendations

Allow Tier 4 operators to register as limited liability concerns, or at least partnerships while maintaining their non-deposit taking status. This will free up their capital structure to accommodate contributed or partner equity. A second order policy outcome is firm-level accountability that will result from this, as investors and/or partners seek to protect their assets.

The monitoring and evaluation function within sub-sector associations must incorporate a decentralized structure that is organized around zonal-based compliance teams. Zones should have reporting lines to the head of monitoring and evaluation at the secretariat.

Engage the Institute of Chartered Accountants (Ghana) to fashion out annual audit projects for non-deposit taking operators at concessional fees, to be charged as part of annual licensing fee. 

Enforce Rule 31 (Management Information System) as part of the licensing requirement for new entrants to the sector.

The author is a managing consultant, policy analyst and a B&FT columnist