Microfinance and the Integration between Formal and Informal Finance in Ghana

This post was written by Roberta Zenere

Ghana: a brief profile of the country

 Ghana, officially, the Republic of Ghana, is a Western Africa country boarded by Burkina Faso to the north, the Gulf of Guinea to the south, Togo to the east and Côte d’Ivoire (Ivory Coast) to the west. Formerly known as Gold Coast colony under the British Empire, Ghana was the first Sub-Saharan Africa country in which Europeans arrived to trade, initially in gold, later in slaves. Ghana was also the first state in the region to gain political independence from European colonial rule in 1957.

Over the last decades, income poverty[1] in Ghana has declined and the country was the first one in Sub-Sahara Africa to achieve the MDG target of halving the proportion of the population in extreme poverty in 2006. In particular, between 1992 and 2006, the number of poor reduced from 7.9 million people (52% of the 1992 population) to 6.3 million people (29% of the 2006 population)[2]. High real GDP growth rates, political and macroeconomic stability, movement of the labour force from agriculture towards informal urban employment, introduction of small-scale programmes in agriculture, industry, rural energy and microcredit are among the key factors that contributed to the progress towards poverty eradication (The World Bank 2011b).

In addition, trends in the Ghanaian Human Development Index (HDI), suggest that, over the years, the well-being of the overall Ghana population has improved not only in income terms. In 2011, with an HDI of 0.541 Ghana was classified within the medium human development group. The country ranked 135th out of 187, thus above the regional average of Sub-Saharan Africa whose HDI was 0.463 (See Table 1).

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Table 1: The HDI and its components

Financial inclusion in Ghana: a glance at the FinScope Survey

To describe the levels of financial inclusion the FinScope methodology[3] categorizes the adult population, i.e. people that reach the minimum age at which it is possible to enter a legal financial transaction in their own capacity, according to their usage of formal and informal financial products.

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Figure 1: The Ghanain Financial Access Strand
Source: Finscope (2010)

The Financial Access Strand 2010 (See Figure 1) reports the percentage of:

  • financially excluded individuals, i.e. «adults who do not have/use any financial products and/or services. If borrowing, they rely only on friends/family and if saving, they save at home» (FinScope 2010, 3);
  • individuals who have/use informal products/services and no formal products (informally served);
  • individuals who have/use formal non-bank products/services and no commercial bank products (formally served);
  • individuals who have/use commercial bank products (formally served).

The figure highlights that 44% of adult Ghanaians (5.9 millions) are financially excluded, i.e. they do not have/use financial products or services. Among the 56% of adult Ghanaians (7.5 millions) that are financially included, 40.70% (5.5 millions) are formally included either by having/using commercial banks products (33.90%) or by having/using non-banks formal financial products or services (6.80%).

The data also show that the informal sector, by serving 15% of the adult population, has a major role in expanding the boundaries of financial inclusion, especially in the area of saving mobilization and credit provision (See Figure 2). In particular, friends and family are the most common informal borrowing source, especially in rural areas, while the preferred informal saving mechanism is constituted by Susu collectors/groups.

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Figure 2: The Ghanaian Landscape of Access
Source: FinScope (2010)

The data on financial inclusion and the poverty situation of the country illustrated above suggest that in Ghana there is a “need for microfinance” to contribute to poverty alleviation and tap the unmet demand of financial services from low-income individuals, especially those working in the informal sector.

Evolution and composition of the Ghana Microfinance Sector

Ghana has a long and strong tradition in microfinance. In particular, it is believed that the first African credit union was set up in Northern Ghana by a group of Catholic Missionaries from Canada. Susu (saving collection), one of the microfinance schemes currently implemented in the country, was introduced in the beginning of the 16th century (Asiama and Osei, 2007). Then, several financial sector reforms and programs[4] were implemented and nowadays, the Ghanaian microfinance industry is vibrant. According to the MixMarket database, in 2011 the microfinance market in Ghana accounted for 300,878 active borrowers for a total loan amount of US$ 224.6 million and 917,617 depositors for a total deposit amount of US$ 237.8 million. Figure 3 illustrates the first ten MFIs operating in the industry for gross loan portfolio. Taken together, these MFIs, account for 86% of the total loan portfolio in the industry.

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Figure 3: Top ten MFIs per gross loan portfolio
Source: MixMarket Database (2011)

However, it is worth to point out that these data underestimate the real size and potential of the Ghanaian microfinance industry. Firstly because among the various semi-formal and formal operators only 78 are currently reporting to the Mix Market. Secondly because they do not take into account the myriad of informal institutions (e.g. Rotating Savings and Credit Associations (ROSCAs), moneylenders, Susu Collectors) providing microfinance services to the unbanked. Recalling the distinctions among formal, informal and semi-formal financial institutions analyzed in the previous chapter[5], the following paragraph, analyzes the types of financial institutions operating in the Ghanaian microfinance industry.

Types of institutions operating in the Ghanaian microfinance landscape

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Table 2: Formal, Semi-formal and Informal institutions operating in the Ghanaian microfinance sector

Table 2 depicts the composition of the Ghanaian microfinance sector. In particular, the supply of microfinance services in Ghana may be analyzed by adopting a ‘formality criteria’ in order to distinguish the several typologies of institutions operating in the microfinance sector with different degrees of formalization of internal rules and structures. Within this framework, MFIs may be categorized into the formal, semiformal and informal financial sector (Ledgerwood 1999; Andreoni and Pelligra 2009).

  1. 1.      Formal financial sector
  • Development Banks, Merchant Banks and Commercial Banks

These banks, traditionally engaged in the provision of financial services to high-income individuals are now entering the microfinance sector as part of their Corporate Social responsibility (CSR) strategy, often in partnership with other institutions specialized in dealing with the so-called ‘unbanked’ that often lack of the adequate capital base to effectively perform microfinance projects.

  • Rural and Community Banks (RCBs)

RCBs are public companies owned by members of rural communities. RCBs were introduced in 1976 by the BoG to operate as financial intermediaries for promoting development in rural areas not served by commercial and development banks that were mainly concentrated in urban zones (Steel and Andah 2003).

  • Saving and Loan Companies (S&Ls)

In the late 1980s, in Ghana, many Savings and Loans Companies (S&Ls) implementing the savings collection methodology typical of informal financial units (i.e. Susu collectors) were created. In particular, capitalizing on the strong demand for credit and adopting the Susu methodology, S&Ls hired collectors to gather daily deposits and provided credit facilities to savers who accumulated capital for six months or more (Steel and Andah 2003).

  1. 2.      Semi-formal Financial Sector
  • Non-governmental organizations (NGOs)

NGOs are neither government-related nor profit-oriented organizations that provide financial services to a specific target group generally excluded from mainstream banking (Ledgerwood 1999). In Ghana the role of NGOs is extremely important for the provision of financial services in the North where the presence of both rural and commercial banks is inadequate. Yet, a distinguishing feature of the country is the scarce presence of NGOs with microfinance as the core mission. Indeed, most of the NGOs operating in the financial system are multipurpose or serve primarily humanitarian objective, but engage in some microcredit programs as part of their poverty reduction strategies (UN, 2008).

  • Credit Unions (CUs)

Credit Unions (CUs) (or credit cooperatives) are private financial institutions owned by members who can either deposit their savings or lend money to one another. In coherence with the cooperative principles, CUs adopt a governance model based on the ‘one-member, one-vote’ decision-making rule (Armendáriz and Morduch 2005; Andreoni and Pelligra 2009).

  1. 3.      Informal financial sector
  • Moneylenders

Moneylenders are usually regarded as exploitative monopolists that provide credit at high interest rates to poor borrowers that cannot rely on alternative sources of capital. Indeed, the lack of information and connections operate as a barrier for potential competitors willing to enter local markets, thus preserving the monopolist power of moneylenders already engaged in informal financial transactions with members of their communities (Armendáriz de Aghion and Morduch 2005).

  • Trade Creditors

Trade credit transactions may be either pre-payment of future supply or deferred payment (supplier credit). The former constitutes an important form of working capital, especially in rural areas where traders act as intermediaries between farmers and urban markets. In this case the buyer provides credit in terms of advances against future purchases. No collaterals are required, but the agreement to sell the crop over a specified period of time (Steel and Andah 2003).

  • Relatives, friends and neighbours

Savings and lending practices among relatives, friend and neighbours are a form of informal finance to be used for paying regular expenses (e.g. school fess) or purchase durable goods (e.g. cell phones). These practices are common in both urban and rural areas and may involve cash or in-kind transactions (Awasu 2012).

  • Rotating Savings and Credit Associations (ROSCAs)

A ROSCA is built on a group of people, who agree to pool financial resources to a common fund that, in turn, is allocated to each member of the group. After each member has accessed to the fund once, the group either disbands or starts again with a new cycle (multi-cycle ROSCA) (Armendáriz and Murdoch 2005). In Ghana, the ROSCA methodology is purely implemented by Rotating Savings Susu Association (or Susu groups), largely used in the non-commercial sector by urban wage-earners or rural farmers (Aryeetey and Gockel 1991).

  • Susu Collectors

Will be analyzed in the following chapter

Finally, it is also worth to point out that the presence of several undercapitalized institutions engaged in the field of microfinance with lack of clarity on their operating requirements and permissible activities led the Bank of Ghana (BoG) to intervene in the sector with the issue of the ‘Operating Rules and Guidelines for Microfinance Institutions’ in July 2011 (Notice n° BG/GOV/SEC/2011/04). The notice was aimed at including previously unregulated semi-formal and informal agents (e.g. Susu collectors, moneylenders) within the Central Bank scope of regulation and supervision, thus containing the risk within the sector, protecting people involved in microfinance activities, encouraging the development of sound financial institutions as well as increasing the confidence level in the system to attract new domestic and foreign investments.

This second chapter has briefly analyzed the level of financial inclusion in Ghana and the various typologies of institutions operating within it, stressing on the fragmentation between formal, semi-formal and informal institutions that characterize the Ghanaian microfinance landscape. The following chapter will focus on a specific informal saving mechanism, the Susu Collection System and will analyse the case study of Barclays Microbanking Initiative as a case study of a financial linkage between traditional commercial banks and the Susu Collectors.


Armendàriz de Aghion, B. and Morduch, J. (2005), The economics of microfinance, USA: Massachusetts Institute of Technology

Andreoni, A. and Pelligra, V. (2009) Microfinanza. Dare credito alle relazioni, Bologna: Il Mulino

Aryeetey, E. and Gockel, F. (1991) ‘Mobilizing domestic resources for capital formation in Ghana: the role of informal financial markets’, AERC Research Paper n°3, August, Initiative Publishers, Nairobi

Asiama, J.P. and Osei, V. (2007) ‘A note on microfinance in Ghana’, Bank of Ghana Working Paper n° 1

Awasu, C. (2012) Relational transactions: the social dynamism of informal finance in Ghana’, African Journal of Social Sciences, Vol. 2, Issue 4, pp. 1-15

Bank of Ghana (2011) Operating Rules and Guidelines for Microfinance Institutions (Notice n° BG/GOV/SEC/2011/04)

FinScope (2010) FinScope Ghana 2010, FinScope

Steel, W. and Andah, D.O. (2003) ‘Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry’, Africa Region Working Paper Series No. 49, June 2003, The World Bank

United Nations (2008) Ghana financial sector assessment, United Nations Advisors Group on Inclusive Financial Sectors Private Sector Working Group

The World Bank (2011b), ‘Republic of Ghana: Tackling Poverty in Northern Ghana’, Report No. 53991-GH, The World Bank, Washington


[1] These data are presented in the World Bank report ‘Tackling poverty in Northern Ghana’. By drawing on data included in successive Living Standard Surveys published by the Ghana Statistical Service (GLSS3 in 1991/2, GLSS4 in 1998/9 and GLSS5 in 2005/6), the report focuses on monetary poverty measured as the level of per capita consumption, adjusted for differentiated needs across individuals and prices across regions

[2] Nevertheless, poverty reduction was uneven across the country. In particular, in Ghana there is strong evidence of a North-South divide that have widened over the years 21 . Between 1992 and 2006, thanks to policies of rural development and urbanization, the number of poor declined of 2.5 million in the South. On the contrary, in the North the number of poor increased of 0.9 million, probably because the poverty reduction performance resulted from a number of key factors (e.g. expansion of exports, greater public spending) that Northern Ghana has benefited less from.

[3] The FinScope Survey, a research tool developed by the FinMark Trust, an independent trust aimed at ‘Making financial markets work for the poor’ that operates in Africa with a special focus on the Southern African Development Community (SADC) countries. In Ghana, the FinScope Survey was commissioned in 2010 by the Ministry of Finance and Economic Planning (MoFEP) in order to achieve the following objectives (FinScope 2010): measure the levels of financial inclusion; illustrate the types of financial products and services used by those individuals that are financially included; understand the barriers that constraints the usage of financial products and services. Researches were conducted by Synovate Ghana through face-to-face interviews to a sample of 3.643 Ghanaians identified by the Ghana Statistical Service (GSS) and aged 15 or older. Technical and financial support were provided by the FinMark Trust, the World Bank and the UK Department for International Development (DFID) (FinScope 2010).

[4] Among them, the creation of the Agriculture Development Bank (ADB) in 1965 to meet the needs of those who operated in the fisheries and agricultural sector; the institution of Rural and Community Banks (RCBs) in the 1970s to facilitate lending to farmers; the financial liberalization of the 1980s as well as the introduction of financial sector reforms for the establishment of non-bank financial institution such as saving and loans companies and credit unions (Asiama and Osei 2007). Then, in 2006, the Government of Ghana introduced the Ghana Microfinance Policy (GHAMP), i.e. the first comprehensive microfinance policy framework whose objective was to «…promote the delivery of sustainable and efficient microfinance services to achieve wealth creation and poverty reduction […]» (MoFEP 2006, 11).  In the same year, the government launched the Microfinance and Small Loans Center (MASLOC) whose aim it to disburse micro and small credit facilities to the ‘productive’ poor normally working in the micro, small and medium enterprise sector, including women physically challenged and the youth.

[5] Financial inclusion and the Potential of Linking Formal and Informal Financial Institutions


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