Adapting to digital disruption: Why the microfinance sector needs an increase in lending limits

By Jonathan OWUSU-ANSAH

The microfinance sector’s role in financial inclusion focuses on providing financial services to the unbanked and underbanked population, especially in rural areas. This function has transformed several businesses ranging from table top sellers to big time market shop owners in the country.

However, some of the regulations and guidelines for the establishment and operationalization of Microfinance institution needs critical reviews to enable Microfinance institutions to continue operations in the financial intermediary space.

Commercial bank’s that formally would not consider some clients reserved for the microfinance sectors are now opening branches and taking over clients because a microfinance can only lend to a certain limit.

With the advancement in technology, Mobile money lending is also taking a significant toll on the operations of Microfinance companies in that the lower tier lending amount which was also the preserve of this sector has been taken over by the Telco’s with minimal operational cost hence putting a heavy toll on the Microfinance sector to compete with it high rates.

In resent development the Bank of Ghana directives to formally license Digital Credit Service Providers to operate in Ghana comes with its own challenges to the Microfinance institutions as well.

1. Operational Challenges for MFIs

The technology in the Loan Processing provides a Digital platform that can disburse small loans within minutes or hours, with minimal paperwork or in-person interaction. Microfinance institutions that are traditionally more manual in their operations may struggle to match this speed and convenience, which is crucial for attracting customers seeking quick access to funds.

Microfinance institutions that need to catch up with this challenge may need to invest heavily in technology and digital platforms to scale their operations. While this could improve efficiency, it also represents a significant investment in upgrading current systems, which may be difficult for smaller MFIs without the capital or technical expertise.

1. Shift in Loan Products and Market Demands

Increased Demand for Small Loans on Digital platforms can quickly provide smaller loans (typically without physical collateral), making them highly appealing to the same demographic that microfinance institutions (MFIs) have traditionally served. Microfinance institutions that are unable to match the convenience, speed, and digital accessibility of these platforms may risk losing this critical customer base to digital lenders.

• Pressure on Interest Rates and Fees

Microfinance institutions, which often operate with higher costs due to their physical presence and personnel, may struggle to compete with the lower interest rates and fees offered by digital platforms for small loans. The Digital platforms are well-positioned to handle their costs through automation and low overheads, which allow them to offer competitive interest rates and lower fees.. This could force MFIs to adjust their pricing structure, potentially sacrificing profitability on these smaller loan amounts to remain competitive.

1. Impact on Financial Sustainability of MFIs

Many MFIs rely on loans from GHS 500 – GH10000 for more significant revenue streams, with the little portion of their profits coming from higher-value loans, often above GHS 10,000 to GHS20000. The digital lending platforms’ focus on small loans up to GHS 10,000 could change the profitability dynamics, as MFIs would need to increase their volume of small loans to sustain profitability. This might strain their operations unless they effectively scale their processes to handle a higher volume of smaller loans.

1. Consumer Behavior and Loan Repayments

Convenience and accessibility and the ease of obtaining small loans via mobile applications is likely to shift consumer behavior toward digital platforms. Borrowers who may have once relied on MFIs for GHS 500 to GHS 10,000 loans may prefer the convenience of applying for and receiving loans via their smartphones without needing to visit a physical location. This shift could lead to a decline in foot traffic at MFI branches, impacting their revenue from small loan products.

In light of the emergence and future rise of digital lending platforms and their ability to offer smaller loans with ease, Bank of Ghana (BoG) should seriously consider revising the current lending cap of GHS 20,000 for microfinance institutions (MFIs). This adjustment could help MFIs stay competitive, expand their customer base, and sustain their operations in an increasingly digital credit market. This would enable MFI’s to

1. Alignment with Market Trends

With changes in economic conditions over time, most Micro, small, and medium enterprises (MSMEs) a key segment for MFIs have outgrown the current cap of GHS20000 and often need loans beyond GHS 20,000 to scale their operations. The current cap limits the capacity of MFIs to cater to the evolving needs of this segment, pushing them towards smaller, short-term lending, which may not be profitable in the long run. Hence the need to increase the cap to enable MFIs maintain this these customers and they lose some of the lower tier loan amount to the digital platforms.

1. Supporting Business Growth and Economic Development

By increasing the lending cap, microfinance institutions can become catalysts for growth in the small business sector, helping drive the economy forward through larger loans amounts that support job creation, infrastructure development, and broader community empowerment as business expands.

• Stimulating a Competitive and Innovative Microfinance Sector

Allowing higher loan amounts would stimulate innovation within the microfinance sector, encouraging MFIs to diversify their financial products and services to meet market demands. This could include high business loans, education loans, and agriculture-focused credit, which would all require higher lending thresholds than the current cap allowed. Otherwise, MFIs may find themselves outpaced by digital lenders or larger financial institutions.

1. Financial Inclusion and Customer Expansion

The current cap of GHS 20,000 might exclude a large segment of the population who require higher loans, therefore limiting MFIs role in the financial inclusion as customer that grown with them have to look to elsewhere for additional business support when they get to the threshold.  Increasing the cap would allow MFIs to provide greater financial inclusion, especially for entrepreneurs and business owners who may be excluded from the formal banking sector but need higher-value loans to thrive. It will also allow MFIs to serve higher-income customers who are looking for more substantial credit facilities.

The Bank of Ghana must recognize the shifting landscape in the financial sector, with digital lending platforms rapidly becoming a popular choice for small loan access. To ensure that microfinance institutions remain competitive and relevant, the GHS 20,000 lending cap should be revisited. By allowing microfinance institutions to lend more, the BoG can support financial inclusion, business growth, and economic development, all while keeping MFIs at the forefront of the digital lending revolution. Adjusting this cap responsibly, with appropriate safeguards and risk management frameworks, will help microfinance institutions thrive in an evolving market.