Microfinancing, a system of small loans for new entrepreneurs, has recently gained popularity as a method of spurring innovation in the sub-Saharan economy. However, this type of lending is not new to the West African nation of Ghana. Over the years, this practice has expanded into the formal sector, becoming a vital asset to the growth of entrepreneurship in Ghana. Many of the lessons learned from the Ghanaian microfinance system might be applied to other developing countries.
Roots of the Ghanaian system
Ghana's long history of microfinance has roots in its 'susu' system.
In Ghana, a country of 24 million people, microfinance is merely a modern iteration of a longstanding traditional banking system called “susu”. Under the susu system, Ghanaians have traditionally traded money with each other in exchange for periodic repayment with interest. This system arose because 95 to 96 percent of Ghana’s population does not have access to formal banking institutions, which see mom-and-pop businesses as very small clients with little to no collateral security backing their operations. Rather than turning to alternatives like moneylenders and credit associations, Ghanaians created the self-regulated susu system to make up for the lack of access to formal banks.
Recent attempts to formalize the susu system have seen the creation of organizations like GHAMFIN, the Ghana Microfinance Institutions Network, in order to connect small business owners with potential investors. GHAMFIN is an umbrella organization that collaborates with government and donor networks, particularly in the area of policy change, to promote investment in Ghanaian businesses. It consists of 80 microfinance-focused banks and serves over 60,000 clients. In order to participate, clients pay a small membership fee in return for easy access to grants and loans that enable small businesses to get off the ground.
According to Ghana’s Ministry of Finance, microfinance in the country has gone through a four-step evolution, transforming it from informal agreements between individuals to a practice recurring throughout the country. In the 1950s, the Ghanaian government started offering subsidized credit to citizens when it realized that people were unable to overcome poverty without start-up funding for business ideas. The emergence of non-government organizations in the 1970s started a new period of credit for entrepreneurs. The third step towards today’s microfinance system emerged in the 1990s, when institutions, like banks, started developing branches devoted to microfinance operations. Finally, in the mid-1990s, organizations like GHAMFIN emerged to integrate microfinance into the mainstream Ghanaian economy.
Applying lessons from Ghana
Notably, Ghana has been able to extend the microfinance system to encompass industries outside of the business sector. Among other changes that have benefitted Ghanaian society at large, the practice of microfinancing for real estate has allowed many individuals in low-income groups to improve their standard of living. By continuing to apply microfinance to other sectors of the economy, Ghana will be able to foster a sense of individual entrepreneurship that encourages people to work hard to build better livelihoods for themselves and their families. Ghana has created a system that can be applied to benefit other developing nations.
