Rural Banking Sector in Ghana: Alexander Asmah Presents Amenfiman Rural Bank

Interview with Alexander Asmah, CEO at Amenfiman Rural Bank

What is your assessment of the sector? What are the latest trends in Ghana? Is it a very competitive environment?

The banking sector and microfinancing especially are very competitive in Ghana. We have various tiers of banking: first the universal banks, then the microfinance sector. The microfinance sector is made up of rural banks, saving and loans companies, microfinance institutions, and even non-bank financial institutions like the non-deposit taking financial institutions. We are a regulated institution by the Bank of Ghana and we fully comply with Banking Act 930, which is the Banks and Specialised Deposit-Taking Institutions Act, 2016. Our operations are fully regulated, and we operate like a bank. The only thing we are not allowed to do is handle foreign exchange. We do all the other businesses that any bank does: we accept deposits, we handle investment, we grant loans, etc. Our business focus is on micro, small, and medium enterprises. We typically look at financial inclusion and we deal with the lower end, the lower to middle level, of income earners. The banking landscape for the past five years has seen tremendous growth. The rural banking sector has more than doubled its total assets, and the entire banking system in general has almost tripled its total assets in the same span of time. We have seen steady growth in profitability, the number of clients, and total deposits from our clients. However, last year, we saw a clear sign of stiffer regulation. Act 930, the Banks and Specialised Deposit-Taking Institutions Act repealed the former Banking Act. Immediately after the Act was passed, we saw changes in regulations coming up. Already, the governor has announced that by the end of this year, universal banks should comply with new capital requirements. After that, they will come into the other tiers of banking. So, we expect to see a lot of regulations coming soon to our sector. In general, the banking sector in Ghana has been very competitive and it is going to be much more competitive. There will be a lot of consolidation, because when we start seeing signs of stricter capital requirements, banks will be encouraged or forced to merge, and then we can take on much bigger risk and maybe do more business.

In the long term, is that possible that your bank will merge or acquire another regional bank and continue to grow to become the only regional bank?

What has kept us in business and on top is that a long time ago, we realized that to remain relevant, we needed to do two things right: we needed to have the right people and we needed to have technology.

This is absolutely feasible. This is the future of rural banking in Ghana. It will happen shortly with the universal banks, but it will take time to happen in the rural banks. We have 139 or 140 rural banks in Ghana today. Every region has more than ten rural banks. The western region has fourteen rural banks. Each bank is within eight geographically restricted areas. I see a future where we can have all the rural banks in the western region consolidated into one big regional bank that has bigger capital, bigger resources, that can take much bigger risk and manage it properly, and hopefully be more profitable. However, we have a unique situation. The rural banks were set up by the people. It is not the type of business where investors got together to create a business and happened to set up a bank. It was a community ownership and the people in the communities feel more like the owners of the banks. When they have to give that up, it is quite difficult. When you have to meet shareholders and say let’s merge all five banks within an area and form one big bank, people feel like they are losing control and losing their ownership, that their control of the business has been diluted. The Bank of Ghana has been working with AIB for about four or five years to try to merge some of the banks. Their assets were not growing enough, their capital was too small, so they were not meeting SETI required capital, and they were not very profitable. They were encouraged to merge and even given sponsorship through consultancy for the mergers. You could see the fear and resistance from the community owners that were not ready to give up. But, when regulation pushes you into a corner, you either merge or leave. That is the trend we are seeing. One regulation says the capital requirements are raised to that of the universal banks, from 120 million to 400 million, more than 300%. If that happens to us and you are given one year to comply or leave, you have to comply, or you stop being a business. We can see that future happening even though it will be quite difficult. A lot of communication and talking will have to go into this.

When do you think that will happen?

The truth is that the Bank of Ghana has been quite soft on rural banks and the basic reason is the fact that they want to keep those services for the local people who otherwise would not have access to traditional banks. If that trend changes, then everything else will change. I cannot put a timeline on it, but I can clearly see that that will be the way forward.

You are competing with other institutions, national banks, microfinance companies and even some international banks. What are your competitive advantages?

The industry is very competitive. We have 34 universal banks, over 140 rural banks, over 60 savings and loans companies, over 500 microfinance institutions, non-bank financial institutions, investments houses, insurance companies, and a number of NGOs and businesses who are involved in microfinancing not-for-profit. All these institutions are competing for their customers’ interest one way or another. What has kept us in business and on top is that a long time ago, we realized that to remain relevant, we needed to do two things right: we needed to have the right people and we needed to have technology. We are not totally up there in terms of technology. We are still developing. But we have developed the right people to understand our market, our clients, and what our clients need. In certain areas, universal banks cannot survive. They come in with certain banking standards from Accra and have a certain idea of what they want these rural banking clients to do. But we live there with them and we understand what they want us to do so we are able to serve them in a way that even when the universal banks offer them something, they want to come and ask us if they should take it or not. For me, the biggest competitive advantage for us has been building the right people. They know what our clients need and can give it to them. In the typical rural community, the client does not need too many forms to complete, too many questions to answer. They just need to see something simple and you can process that into a solution for them and they are fine. Although, we are said to be competing with the investment banks, we are competing in terms of quality of service and delivery. But, in terms of the actual customer base, we have a different focus from what they have. Secondly, there are a lot of people that the universal banks will not serve, but we will. The investment banks consider clients who are low earners as expensive clients. You can keep one customer in your base and he gives you a very small return, or you can go for one big company. In one year, we may have done 20 million or 30 million loan facility to 20,000 clients. But the universal bank would do 20 million to one enterprise and then be done. They consider our type of client to be expensive to maintain and to keep. We have specialized in making those types of clients happy and keeping them. We make them happy and they make us happy, and we continue to be in business. In terms of competitive advantage, we have our own strength and we maximize and capitalize on that. We keep our business focused and we serve our clients. Another thing that we do is we do not consider our profit in just monetary terms, but as providing a service to people. We deploy many people throughout the community to come to your home or office to take your small deposits to the bank. We see that as service because our service is to inculcate a savings culture into the people, and that is the heart of microfinancing. A universal bank’s aim is to attract your business and make a good return on it. They would not spend so many resources to get such a small amount of money, but we will do that. As a result, people are more comfortable meeting with us and doing business with us. The rural banking industry is thriving. It is serving more people than the rest of the banks combined because we are focusing on the people that ordinarily do not have access to the investment banks and we are providing for their needs.

Are you privately owned, or government owned?

We are a purely privately-owned company. The government and the Central Bank have no shares in our business. The ownership is by private individuals and some institutions. There is a trick in microfinancing: if you do it well, it will pay back in the long term. You will not get immediate term, larger profits, but if you do it sustainably, it will pay back. What appears to be a cost now ends up in the long term to be profits. If I have 15,000 clients today that we are lending money to who had no bank accounts before, no bank will do business with them. But, we give them not only money, but financial literacy training, we build their capacity in handling their businesses, and we set them up with small loans starting from $500, 2,500 Ghana cedis, and we then grow them up gradually. These are mostly women, about 80%, and they are doing business profitably. If you build up the clients well and you serve the clients well, they end up returning back to you in terms of interest on their loans and more. So, you are building an economic ecosystem within a rural community where people are doing various things: processing, farming, agriproducts, etc. This year alone, we have given a lot of money to farmers so that they can buy farm input. That farmer has no collateral. He cannot meet all the banking requirements to take out a loan. But we take the risk. We go to them, we manage them, and by doing that, by the time they harvest their product and have their yield, their yield is coming back to us in terms of deposits and the repayments of their loans and then we are making the return on that. If it is done well and with a more sustainable mindset, then you will have the return in the long run. The business is profitable, and we return one of the best percentages in the industry to our shareholders in terms of dividends. For the past three or four years, we have returned no less than 30% on equity holders as dividends, year after year. If you have invested in equity in our business, in three years or so, you will have gotten your money back and be enjoying the benefits of your investment. A 30% equity return in our part of the world is phenomenal. What appears to be helping people also appears to be a profitable venture if it is done well and we invest in the right resources. The two important resources to invest in are people and technology. Try to serve people at less cost and keep the whole system sustainable. If you pass on too much cost to customers, because they are mostly lower earner clients, they get absorbed by the cost and eventually, they lose their capital and their business. If they are no longer in business, you are also no longer in business. People are improving their lives and then they are returning back to the shareholders who have invested in that enterprise, and the bank keeps on serving them. The whole thing works well for all of us.

You have great assets which should be attractive. Are you looking for investors?

Absolutely. We are actually getting a lot of attention from the investing community. There are a lot of things on our table that we are considering. What is preventing us from bringing on many such investors is the cost that they put on this kind of investment, especially on debt financing. The price for debts is too high for microfinancing. Pricing of 23% per annum for a lending fund is too expensive. If you do not handle this well, you take the fund and you end up passing on too much cost to the client and we destroy the whole system. We do not want that to happen, so we are growing steadily and gradually. We have the trust of our customers and we have quite good size of deposits, so we are virtually lending with our deposits. We believe that if we have funds that are less expensive, we can reach more people, we can grow faster, and we can impart more people and create more business. However, now, we are not doing badly. If you look at agro for example, around 20% annually is not bad. But it can be far better if we have funds that are cheaper. It is not the fact that funds are not coming. The only challenge has always been the cost of funds. The equity investors are also there. What we have not been comfortable with some of the equity investors that have come to us are the conditionalities that they put around the equity. They want an exit plan because they know that the fact is that our shares are not traded on the stock exchange. If an investor is investing in equity, he wants a plan where in five years, he will exit and need his money back. So, he is just working with you to take all the dividends at the rate or even higher, and at the end of the day, you give the money back only for him to leave. Typically, that is not how equity investment works. You are taking a risk to run a business, so you do not have a guaranteed exit plan to exit at a certain rate. We are building on appreciation on your capital as the business improves, and then you exit with that appreciation at the end. You end up uprooting the whole enterprise to give it to that investor and it is not a good method. So, we are looking for people who understand our nature and the enterprise we are in and who are ready to stand with us. Apart from that, we have seen several investors approaching us to put money in. We are now looking at assessing the alternate market at the stock exchange where we can have a secondary listing, so that at least if you want to exit, you can trade there and sell off your investment and then leave. We want to find a plan that is in the interest of the majority of the investors who have stayed for a long time.

Project yourself two to three years’ time. In the midterm, where do you want to see the company? What will the bank be if everything goes according to plan?

We have a plan starting from this year to grow our total assets and number of clients. Currently, we are at about 180 million Ghana cedis, serving around 200,000 clients. We want to increase that to around 500 million, serving over 600,000 clients. We want to remain the leading rural bank. We want to have the largest share of our industry market size and we want to serve more clients than any institution in our industry. Currently, our business is returning well, and we have a huge potential to expand. This is a good time for anyone to invest in us. We have done our projections, we have seen our growth in the past five years, and we have looked at the economic situation. This is a very modest projection. We have been able to significantly grow our total assets over the past five years from around 20 million Ghana cedis to 180 million Ghana cedis using our own resources, not through any major investment coming in. We have also built a very strong brand. We have been on the Ghana 100 list for the past four years and we have always been the leaders in our industry. Things are quite good for the investing public. If we can have the partnership, then the pace could be faster and very clear. This is a good time to invest in the microfinance industry in Ghana and in rural banking. People think that rural banking in Ghana is a one-man enterprise, but this is a well-structured organization. We have a large shareholder base. It is not a single person that has control over the business that decides to run it any way he likes. Shareholders’ meetings are organized annually, accountability is run, the Board meets monthly to assess its own performance – not only quarterly as in many organizations – and there is a performance review of the whole enterprise quarterly. There are risk systems in place, the technology is there, the market is there, you just need some sort of injection to speed up the growth. I have gone to investment programs and sometimes people find it difficult to understand. We were close to signing a deal with an international investment company and they said they wanted a national impact and they just realized we are only regional. So, they were unable to continue. They do not understand the concept.

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