The microfinance sector is looking to a new deposit insurance scheme from the central bank to shore-up waning confidence in the sector, Collin Amponsah-Mensah -- head of the Ghana Association of Microfinance Companies (GAMC), has told the B&FT.

According to GAMC’s board chairman, the deposit insurance scheme will add to several initiatives sector players are undertaking to revamp confidence and boost the fortunes of microfinance companies.

The central bank has announced that it wants to introduce a Deposit Insurance Scheme by 2015 to insure depositors in the financial system against the failure of institutions.

Deposit insurance is a measure implemented to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of a financial system safety-net that promotes financial stability.

Central bank Governor Kofi Wampah said the scheme is expected to address potential financial-system vulnerabilities and ensure a safe and sound banking industry in the country.

Mr. Amponsah-Mensah, speaking to the B&FT on the sidelines of a seminar organised by GAMC on lessons learnt from the collapse of some microfinance institutions, said the industry’s umbrella-body will profit from the regulation when it is implemented.

Since 2013, more than 50 microfinance institutions have collapsed due to poor managerial skills, while some have been used as a conduit for the perpetration of fraud through Ponzi schemes that lured depositors with absurdly lucrative investment interest rates.

The collapse of a large number of microfinance companies appears to have affected confidence in the sector, and many have become more sceptical about doing business with the industry.

The umbrella-body is also working with the regulator to develop a unique credit referencing system for the industry, expected to be completed by the middle of next year.

“We have come very far with the credit referencing system for the microfinance sector. We have had discussions with the three registered credit bureaus and the regulator, and we came to the consensus that it would be good for the MFI industry to have its own credit referencing system to be managed at Ghana Microfinance Institution Network (GHAMFIN) level,” the board chairman said.

“Although GAMC has its own internal referencing system, we are now bringing on board the other associations [Money Lenders Association and others] by December, and then we will have to sit down and work together with licenced credit bureaus and the regulator to develop a middle link so the others can plug into our servers and take the data they want and vice versa.”

Despite the huge potential of the sector, as at end of May 2014 total assets of MFIs stood at GH¢688.5million, representing only about 1 percent of total assets in the banking industry; meanwhile loans and advances granted by MFIs amounted to GH¢345.5milion during the period and represented about 1.57 percent of credit in the banking industry. Total deposits stood at GH¢344.8million.

Currently, about 500 MFIs have been licenced to operate, out of which 390 are microfinance companies, 50 are money-lending companies, and seven are financial non-governmental organisations.