corresponds to about 60 percent of the capitalization required for domestic banks.<sup>12</sup> Ghanaian credit unions are not subject to MCR. For Tanzania, the minimum capitalization requirements for regional banks and rural community banks appear to be at fairly accessible levels for investors in and promoters of institutional microfinance. The response, however, has been limited: only one regional bank and two rural community banks have been organized. The recently enacted Law on Microfinance Companies appears unlikely to foster significant new entry, as the currently unregulated or unlicensed MFIs are unlikely to achieve the stipulated (but still being discussed) MCR of T Sh 1 billion. Tanzanian credit unions are not subject to MCR.

# **_Capital Adequacy_**

59. In Ghana, the capital adequacy standard (CAR) prescribed for banks, including rural banks, is 6 percent of risk assets. A higher standard of 10 percent of risk assets is prescribed for S&Ls and deposit-taking NBFIs. The Ghana Credit Union Association follows the World Council of Credit Unions standard of 10 percent of total assets. In Tanzania, regional banks and rural community banks are subject to a uniform CAR of 6 percent of risk assets. No prudential standards for capital adequacy are imposed on credit unions in Benin, Ghana, and Tanzania other than voluntary norms recommended by international CFI networks. As credit unions in Benin, Ghana, and Tanzania are not subject to minimum capitalization requirements, consistent with international practices that allow easy entry for member-based CFIs, this puts the burden of prudential regulation on the maintenance of CAR, for which measurement and standards should be similar for CFIs and for banking institutions.

60. The CAR applicable to licensed MFIs in Ghana and Tanzania appear to be lower than is prudent, especially because shareholders of MFIs generally have difficulty in quickly responding to calls for additional capital infusion. For a number of reasons (see Christen and Rosenberg 2000), self-sufficient MFIs (other than rural banks) in the Microfinance Information Exchange database maintain a higher ratio of capital funds to total assets compared to commercial banks, ranging from 17 percent for rural banks, 24 percent for regular banks, 31 percent for CFIs, and 40 percent for non-bank MFIs.

# **_Asset Quality_**

61. In principle, recognizing and setting aside provisions for delinquent loans should be handled more aggressively for MFIs than for commercial banks, given the relatively short-term nature and unconventional collateral typical of microfinance portfolios. Benin, Ghana, and Tanzania vary significantly in how they classify loans as delinquent and in how they provision for possible losses. Only Benin requires provisioning at the time a loan is classified as delinquent, that is, when a payment is overdue by 90 days or more. A loan is delinquent when overdue by 31 days or more in Tanzania, but provisioning is required only when a loan is overdue by more than 180 days. Ghana is the most restrictive, classifying a microfinance loan as delinquent when a scheduled payment is 1 day overdue and requiring provisioning after 60 days. Provisioning at 40 percent is required when a loan is delinquent for a period between 61 and up to 90 days in Ghana and for 181 days or more in Tanzania. Provisioning at 100 percent is required when a loan is delinquent for 151 or more days in Ghana, and for 360 days or more in Benin and Tanzania (table 6).<sup>13</sup>

**Table 6.** Asset Quality Standards for Licensed MFIs, 2002

- 12 This capital adequacy ratio may be more appropriate for other categories of NBFIs that book considerably more assets than the typical S&L (or NGO). In general, Ghanaian rural banks and S&Ls have faced difficulties in raising additional funds from shareholders to meet increased paid-in capital requirements. Nevertheless, a new specialized MFI with international funding has been able to raise sufficient capital to become licensed, although the Ghanaian ownership share dropped from 25 to 2.5 percent following the increase in the capital requirement.

- 13 Global best practice in microfinance is not rigid and allows for some degree of flexibility based on the maturity profiles and amortization periods of different categories of microfinance loans. For instance, for microfinance loan categories with average maturities of 180 days and with amortization payments scheduled every two weeks (or 15 days), none of the full or 100 percent provisioning guidelines for Benin, Tanzania, or even Ghana would make sense or be considered prudent business practice, because the period of loan delinquencies would have exceeded the original maturity dates and amortization payment schedules.

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