Cost implications of microfinance regulation: lessons from Ghana

ABSTRACT

The paper examines the impact of the costs associated with regulation on Microfinance Institutions in Ghana. To achieve the paper objective, we use a unique set of field data from 25 Microfinance Institutions from different regions of Ghana and opinions gathered from the managers of the sampled MFIs. We find that regulation increases an array of doing business costs that MFIs tend to pass to their micro-clients by increasing the interest rates. Furthermore, we find that the costs of regulation have adverse effects on outreach: reduction in percent of female borrowers. These findings are corroborated by the comparison analysis we conducted on Ghanaian MFIs that report to the Mixmarket. Regulatory instruments need to be well designed to achieve their dual roles of providing sound financial services and protecting micro-clients without jeopardizing the outreach mission of the MFIs.

KEYWORDS:

• Microfinance institutions
• cost of regulation
• Ghana

JEL Codes:

• G21
• G28
• G38
• O16

Acknowledgements

We would like to thank, An Thi Hong Nhung, Theophile Serge Nomo and Thang Ledinh for their useful comments. We are also grateful to the useful comments of audiences at our presentations at: the University of Cape Coast (Cape Coast, Ghana), the International School of Vietnam National University (Hanoi, Vietnam) and the Research and Intervention Laboratory on Business Development in Developing Countries at the Université du Québec à Trois-Rivières. All errors are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.