Good Money Chasing Bad Money: Implications for MFIs Management and Governance in Ghana

James Peprah

Asian Economic and Financial Review, 2012, vol. 2, issue 3, 503-517

Abstract: Despite the conviction that microfinance is able to reduce poverty among low income groups, one challenge that still remains in the sector is high default rate. One of the major causes of this situation seems to be the involvement of management, staff and board in loan processing and approval. The current study seeks to explore the cost of retrieving bad loans as a result of taking court actions against clients. The study adopts the qualitative approach to analyze the data from selected MFIs in Ghana. The use of good money for chasing bad money is unprofitable for MFIs. At least MFIs spend about 10.7% of their good money to chase bad money. This has the effect of minimizing the value of shareholders’ wealth and as a consequence reduces profitability. In all the institutions interviewed, there is no code of ethics on loans for the board and management. Among the recommendations include the sale of outstanding debts to debt collection agencies (DCA) which is uncommon in Ghana at a fee less than cost of court actions. Board, staff and management are strongly encouraged to desist from the practice of influencing loan application and approval processes for friends and relations. There should be a high level of trust between board members and that board members should be ethical and have high level integrity.

Keywords: MFIs; good money; bad money; management; board (search for similar items in EconPapers)
Date: 2012
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