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THE Governor of the Bank of Ghana (BoG), Dr Ernest Addison, has called on savings and loans (S&L) companies to return to their core mission of supporting micro, small, and medium enterprises (MSMEs) rather than pursuing large-scale projects typically managed by commercial banks.
He said the shift in mandate exposes S&L companies to high-risk transactions without adequate risk management, leading to issues like non-performing loans (NPLs) and reduced profitability.
He indicated that high financing costs have resulted in elevated lending rates, affecting competitiveness and contributing to adverse selection of risky customers.
“Traditionally, savings and loans companies are expected to provide financial solutions to the micro, small medium enterprises (MSMEs) at the lower end of the market.
In effect, S&Ls are expected to contribute to financial inclusion, however, today, this mission has broadly drifted.
It is on record that savings and loans companies are financing road contractors and discounting interim payment certificate (IPC), among others. This development indicates the allurement of S&Ls out of their niche market into big ticket transactions reserved for commercial banks and yet, without the commensurate risk management tools,” he said.
Dr Addison made the call in a speech read on his behalf by the Head of Banking Supervision at BoG, Osei Gyasi, at the 14th Annual General Meeting (AGM) of the Ghana Association of Savings and Loans Companies (GHASALC) in Accra on Tuesday.
It was on the theme: “Advancing Financial Inclusion for All: The Role of Savings and Loans.”
“Savings and loans companies must revisit their ‘first love’ and strengthen the bonds with the MSME sector, where the greater impacts are achievable.
The sector should rethink its business strategy and models and target low-income entrepreneurs, youth, and women-led ventures excluded by the traditional financial institutions,” he said.
For instance, he said the adoption of the group lending methodology, inspired by concepts such as Grameen community banking or village banking models in Bangladesh, could leverage on membership discipline and social cohesion as a form of guarantee when no collateral is available.
“It is interesting to note that few savings and loans companies are strategically revealing their competitive advantage in this space, and I would encourage others to join,” he added.
He further highlighted the importance of savings and loans companies using technology and FinTech partnerships to reach underserved customers and improve financial inclusion.
He stressed the need for public financial education to address financial illiteracy, saying the sector faces challenges such as solvency, liquidity, and weak governance.
“In the recent past, related party transactions and override of internal control mechanisms had led to serious compliance breaches and excessive risk-taking activities without commensurate risk management practices.
The use of depositors’ funds to finance personal and related-party ventures, while highlighting instances of conflict of interest, seriously impacted the bottom-lines of savings and loans companies with adverse effects on financial intermediation and the broader financial inclusion agenda,” Dr Addison said.
He noted that the regulator was committed to reforms aimed at enhancing the sector's stability and performance, including evaluating business models and promoting mergers and acquisitions.
The Board Chairman of GHASALC, Kwame Owusu-Boateng, acknowledged the transformative impact of digital financial services in advancing financial inclusion adding that digitalisation, has expanded our ability to provide financial services to individuals in remote and underserved areas, offering lower costs, improved accessibility, and enhanced customer experiences.
He commended member Savings and Loans Companies for embracing digitalisation and encouraged others to do the same, recognising its significant benefits.
“As Savings and Loans Companies, we reaffirm our commitment to promoting financial inclusion. We urge stakeholders — including shareholders, regulators, employees, and development partners — to join us in this important initiative.
Mr Owusu-Boateng said amidst the current economic challenges impacting financial institutions, S&Ls companies are keenly aware of the rising costs attributed to inflation and increased interest rates, which have significantly affected our operations.
Unfortunately, he said, these factors have led to an increase in loan defaults among some of our customers.
To navigate these challenges, he advised members to prioritise operational efficiency including enhancing credit assessment processes, providing financial literacy education to borrowers, and implementing robust loan monitoring systems.
