An investigation of the financial monitoring policies for microfinance institutions in Ghana

The need to regulate microfinance institutions (MFIs) was advocated and researched yet lacks purposeful in-depth exploring studies of the formulation process of financial monitoring policies, their implementation and accompanying challenges. Consequently, this study contributes by reviewing the specific financial policies for microfinance in Ghana and assesses factors mitigating effective implementation of such policies. It also introduces implementation theory into the MF research arena, thus shifting MF research focus. The study revealed that policies formulated for MFIs in Ghana and elsewhere are skewed and policy implementation, monitoring and supervision found to be less effective. The results further identified inadequate support structures and large unlicensed profit-oriented informal microfinance operations in Ghana as major obstacles to efficient implementation of microfinance policies. This paper therefore recommends the creation of a semi-autonomous institution, the National Microfinance Oversight Authority, to license, regulate and supervise the informal microfinance institutions in Ghana. Kwami Hope Quao (South Africa), Lawrence M. Lekhanya (South Africa), Nirmala Dorasamy (South Africa) BUSINESS PERSPECTIVES LLC “СPС “Business Perspectives” Hryhorii Skovoroda lane, 10, Sumy, 40022, Ukraine www.businessperspectives.org An investigation of the financial monitoring policies for microfinance institutions in Ghana Received on: 5th of October, 2017 Accepted on: 21st of November, 2017


INTRODUCTION
Microfinance as a revolutionary poverty alleviation concept seeks to promote financial inclusion (CGAP, 2011;Santosh, Subrahmanyam, & Reddy, 2016) and to empower the hardcore poor (Stewart et al., 2010). The UN's 2005 declaration of microfinance (Banerjee, Duflo, Glennerster, & Kinnan, 2015) further confirms the tremendous impact of MF on the livelihood of the poor in Africa, Latin America, Eastern European countries and the rest of the world. Sarpong (2016) points out that, with approximately 70% of the population unable to make use of banking facilities in Ghana, MF offers a way forward to individuals who 'cannot qualify or meet requirements' to benefit from the mainstream banking sector. However, the MF concept is exploitative (Bateman, 2015) due to large number of unregistered profit-oriented informal MFIs whose activities defied the existing financial regulations in pursuant of profit; a phenomenon which prompted the regulation of MFIs (Ndambu, 2011;Founanou & Ratsimalahelo, 2016). This exploitation is confirmed by Sarpong (2016) who highlights several, recent scandals within the MF sector in Ghana, such as Ponzi schemes and outright fraudulent activities by unscrupulous informal MF operators that have led to loss of lifesavings, resulting in protest marches against fraudulent activities and unfortunately, even some cases of suicide in the Brong Ahafo region of Ghana, after failed efforts to retrieve investments, similar to the Andhra Pradesh microfinance incidence of Bangladesh in 2009. This paper aims to explore the relevant FMPs for MFIs in Ghana, its formulation and implementation. Specifically, this paper will identify peculiar policy implementation challenges in the sector and offer possible strategies.

LITERATURE REVIEW
Advocates of regulation for MFIs (Ndambu, 2011; Founanou & Ratsimalahelo, 2016) prompted efforts made by countries in Eastern Europe, Latin America and many other jurisdictions, including Ghana, to craft various kinds of regulations for the sector (CGAP, 2011;BoG, 2011). Prior to any discussion, it is imperative though to illustrate theoretical frameworks underpinning MF operations: social entrepreneurship, policy formulation, implementation and the conceptual framework on which the paper is grounded.

RELEVANT THEORIES
Entrepreneurship theory studies which evolved from Schumpeter's theory, "Theory of Economic Development" (1934), regarded an entrepreneur as a producer (Santos, 2012). The classic Schumpeterian theory of entrepreneurship focuses more on the process than outputs of entrepreneurial ventures (Santos, 2012); hence, entrepreneurs are considered synonymous with business owners (Kuratko, Hornsby, & Hayton, 2015). Kumar and Gupta (2013) define social entrepreneurs as agents of change in emerging economies. Social enterprises, including MFIs, are hybrid organizations with both financial objectives and a social agenda (Rahim & Mohtar, 2015) that apply innovative and cost-effective methods of addressing social problems, including poverty. However, the recent shift to commercialization (Addae-Korankye, 2012) and a value-creating agenda 'motivates' MFIs to bend the rules and operate outside legal boundaries (Sinclair, 2012;Kinde, 2012). The element of rule breaking (Sinclair, 2012 As a result, policy formulation for MFIs must address their specific environment. Santos (2012) argued that the environment determines social needs and creates opportunities, which the MF entrepreneurs pursue, and also the development of MFIs' legal recognition and legal form. Literature indicates that policy formulation occurs at two levels: problem identification and definition (agenda setting stage) (Embrett & Randall, 2014) comprising actual formulation, decision-making, implementation and evaluation stages. Embrett and Randall (2014) aver that policy formulation should be random and erratic to support Santos' (2012) environment-specific approach.
Consequently, Little (2012) and Geyer's (2012) call for the complexity theory of policy formulation (Hallsworth & Rutter, 2011; Cairney, 2012), which intimates that policy formulation should be regarded as a system, involving many ideas interacting in a non-linear fashion (Smith & Katikireddi, 2012), drawing cooperation from policymakers to ensure that those interactions (Geyer, 2012) can produce new ideas (Pritchett, Woolcock, & Andrews, 2012) and ways of thinking. In this regard, Ghana engaged in a lengthy consultative process that results in the Ghana Microfinance Policy in 2006 (GHAMP, 2006). GHAMP (2006) intimates that "there is the need for dialogue on the formulation, implementation and review of regulatory and supervisory policies and procedures to ensure consistency and cost-effective approaches to regulation across different types of microfinance institutions and products"; this underscored the issuing of operating guidelines (BoG, 2011) for various microfinance forms in Ghana. Smith and Katikiredi (2012) aver that implementation is a stage in the policy cycle of formulationimplementation-reformulation ) that involves carrying out of a basic policy decision (Nilsen, Ståhl, Roback, & Cairney, 2013), incorporated in a statute or in an authoritative decision (Gong & Janssen, 2012). Policy implementation literature indicates two major schools of thought: the top-down and bottom-up views (Nilsen et al., 2013). The topdown school of thought focuses on controllable factors (Nilsen et al., 2013) at a central level and enforces the theory of the mind (ToM) (Foss & Stea, 2014) as conception of policy implementation and underscores the rationality of the MFIs (May, 2014). However, the disposition of MFIs regarding any regulation is relevant for effective any implementation.
The interpretive, democratic, bottom-up school of thought, draws on Michael Lipsky's 'street-bureaucracy' model ). Lipsky's 1980's model asserted that policies are made from daily encounters of street-level workers, termed 'the street-level bureaucrats', which is a feature of the MF sector. Wilkinson and Frost (2015) however explain that organizations charged to implement policies do in fact modify, simplify and re-orient these policies to suit their internal structures and conventional operational procedures (Smith & Katikireddi, 2012;May, 2014). Therefore, policy outcomes may diffuse and lose meaning and this might, intentionally or unintentionally, create deviations (Wilkinson & Frost, 2015) by the MFIs. This is why effective monitoring will promote adherence to financial monitoring policies for MFIs. Ghana's process leading to GHAMP is laudable but less useful for the present MF dispensation characterized by large informal sector; a situation well envisaged and pronounced the need to 'balance continued evolution of a variety of institutions providing microfinance products in order to protect the consumers' (GHAMP, 2006).
Relating this to Wilkinson and Frost (2015), modification and re-orienting policies to market and er-  The figure corresponds with 'change valence and change efficacy' model described by May (2012). While the change valence denotes the extent to which MFIs collectively value any change a new policy brings about, the change efficacy is resource-based and relates to implementation capability, consisting of resource availability and other emergent factors in the market space of MFIs (May, 2012). This argument is consistent with the intended objective of the GHAMP document, however, since the market space has changed and the sector is now dominated by informal profitoriented MFIs, a new consultative engagements will have ensure the dispositions of the MFIs are aligned to the objectives of the regulation and promote reviews that will enhance compliance. This will promote smooth adoption and facilitate implementation.
When policy formulation, adoption, implementation and evaluations process lacks a gap in policy implementation is created (CGAP, 2011) and failure becomes imminent. An implementation gap can also arise from the policy itself, when such a policy does not emanate from the collaborative ef- . This assertion relates to the GAMC, an apex body, whose mandate is to offer technical assistance and exercise supervisory role over the MFIs, seems to lack the technical capacity and adequate funding to execute this more effectively. Winter (2012), however, espouses that when implementation is limited to key attributes of policies, such as capital requirements for MFIs, complex chains of implementation actions are involved, as well as indirect control and less supportive political environments, there is nothing short of failure. Based on this, the Policy Ownership Model, which seeks to blend the expectations and resources of all actors and also engages consultation essentially with informal MFIs more on continual basis, is needed to embed the views of the MFIs.

CONCEPTUAL FRAMEWORK
This paper conceptualizes a financial monitoring policy ownership (FMPO) model as presented in Figure 2. This '3-Pillar FMPO model' is developed on the premise that participation in decision-making integrates the views of all interest groups (Hill & Hupe, 2015; May, 2013). These individual institutions' input should devolve into robust decisions that the MFIs will adopt. Thus, it is assumed that the numerous informal MFIs through the apex institutions will participate in consultations and cooperate with regulations regarding their operations; and this will enhance compliance and effective implementation.
This is thus a democratic model , where input from the firm internal structures (configuration), comprised of the informal MFIS operating methods and an external configuration that represents the Bank of Ghana and the financial regulations. This study also assumes this 3-pillar concept will devolve into a 'hybrid' regulatory framework that will work better for MFIs to internalize and operationalize the existing guidelines.

METHODOLOGY
This study adopted a mixed methodology based on multiple influences that account for less than expected performance of MFIs, which calls for an inquiry that is both inductive and deductive. This research paper is inclined to descriptive analysis, as the aim was to explore policy implementation challenges of MFIs and suggest strategies to effectively implement the FMPs in Ghana. The study was limited to tier two MFIs licensed by the Bank of Ghana (BoG) operating in the Accra, as the target population with a sample of 65 out of the regional figure of 236, which is a good representation, since Accra houses branches of most MFIs. The respondents were mainly senior managers and executives of the MFIs who were purposively selected to ensures information received is appropriate to the phenomenon of interest (Palinkas et al., 2015).
The study used a combination of both a 5-point Likert scale, closed-ended questions and five structured, open-ended questions, purported to probe for certain critical information, to collect primary data for both quantitative and qualitative analysis.

FINDINGS
The quantitative data gathered were analyzed and converted into frequency graphs, component tables and cross-tabulations. Factor analysis conducted on the variables tested indicates three themes, as depicted in Table 1.
The regulations and their formulation are found to be more influential on the performance of MFIs. The statistical test indicates the significant impact of this variable at 0.713 KMO, with a Chi-square of 0.000. This test justifies the important aspects of the stated or mentioned variables in the operations of MFIs.   (Tables 1 and 4 (for Table 4, see Appendix)). The analysis of the combined effect of the mentioned variables of 'regulations and their formulation' is that regulations do have significant implications for effective and efficient operations of MFIs in Ghana.

IMPLEMENTATION, MONITORING AND SUPERVISION' IS STRONGLY SIGNIFICANT AND RELEVANT TO THE OBJECTIVE OF THE RESEARCH
The results indicated that implementation, monitoring and supervision did not influence the operation of the MFIs as the availability and formulation variables discussed earlier. However, the theme and its component variables indicate statistical significant impact at 0.697 KMO on MF activities. The statistical importance of this theme, especially 'co-operation and dialogue', statistically valued at 0.740 KMO (Tables 2 and 4 (see  Appendix)), indicates how dialogue and cooperation, to foster implementation of the relevant regulations; impact the operation of MFIs in Ghana (Figure 4).    (Tables 3 and 6) and well as large and ever increasing informal profit businesses licensed as MFIs in Ghana. Other mentionable variables, such as insufficient funding and educational support from the regulatory arms, which put KMO values at 0.905, 0.895, 0.862 and 0.880 for MoFEP, BoG, SEC and GAMC, respectively (Table 3 (see Appendix)), further strengthened the findings and affirm the high level of impact the variables have on the operations and overall performance of MFIs in Ghana.

CONCLUSION
The primary aim of the study was to explore the FMPs pertaining to MFIs in Ghana, their formulation and the implementation of such regulations, along with implementation challenges peculiar to the application of FMPs in Ghana.
As far as regulations are concerned, this paper concludes that adapted prudential regulations do exist for MFIs of all tier levels in Ghana and this policy is regularly reviewed. However, the study concluded that issues relating to minimum capital requirement, capital adequacy and reporting requirements, as well as liquidity regulation aspects of the guidelines for FMPs, are less friendly for implementation. Minimum capital raises ultimately disables most of the MFIs the renewal of their licenses, and this adds to the mass of already illegitimate operators carrying out MF activities in Ghana. The study also discovered that the formulation process lacks sufficient and continual stakeholder involvement. The implication of this is that the operating guidelines have become less effective, as far as the disposition of informal MFIs dominating the Ghanaian MF sector are concerned.
The study, in addition, concludes that support structures, especially technical support are inadequate. Less technical support was affirmed by this study as a recipe for ineffective implementation of the FMPs. Consequently, supervision and monitoring were less effective and were identified as a major cause that generates the proliferation of unlicensed and illegitimate informal MF activities in Ghana.

RECOMMENDATIONS
The paper therefore proposes a model of policy ownership, as discussed earlier, to be facilitated by creation of National Microfinance Oversight Authority (NMfOA), independent of the BoG, which will license, regulate, closely monitor and supervise the various MFIs in Ghana. This authority creates the forum for policy making and implementation with representatives from the Bank of Ghana and the MFIs apex institutions on its board; that is, the sentry will effectively engage stakeholder participation. It, thence, has the overarching oversight of the financial subsector to promote effective implementation of all policies regarding MF operations. This paper indicates this need for a separate office to handle MF operations thereby relieving the central bank of this extra responsibility whilst also serving as a national training center to educate and equip MF management with the requisite financial management and reporting skills that will enhance appropriate and timely reporting, as well as improve sector performance.