substantially expanding the ability of MFIs to mobilize financial resources beyond traditional grants and donations.

42. However, the remaining traditions of the former credit quota system can be detrimental to microfinance, and further policy clarification on this aspect is indispensable. The BOG continues to coordinate closely with GHAMFIN and with the Ghana Credit Union Association (CUA) to develop regulatory standards that can help promote institutional growth of the microfinance industry, and is seriously considering ways to simplify prudential standards/guidelines. A further development that bears watching is the establishment of a Government-sponsored and supported apex institution for rural banks. The experience elsewhere has shown that government-promoted apex organizations pose a significant risk of distorting the allocation of scarce financial resources and competing unfairly against private MFIs because of access to subsidized resources, thereby retarding the development of truly sustainable microfinance.

43. The Rural Banks, S&L companies, Credit Unions which are registered with and licensed by the BOG are not directly included in the central clearing and payments system. They participate in the central systems for clearing and payments through the larger commercial banks. BOG cancelled checkclearing services for all rural banks in 1992, which has made it extremely difficult for even the better rural banks to effectively compete in the marketplace, retain their clientele, and lower their operating costs. Neither do Rural Banks have access to BOG's discount window and all of them are subject to identical loan-to-deposit ratio requirements.

44. Credit unions are currently regulated under a self-regulatory mode, in the interim that a separate set of prudential norms and guidelines specific to credit unions is being put together by the NBFI!BOG. In addition, credit unions approved for licensing by BOG have to comply with and meet the prudential standards set by the CUA, whose vetting is pre-requisite to BOG licensing. The prudential norms followed by the CUA, which is supported by the Canadian Cooperative Association (CCA), are sirnilar to operating and financial standards promoted by the World Council of Credit Union (WOCCU).

45. **Prudential standards.** The risk management criteria considered by BOG as important for MFIs and the adjustments made to recognize characteristics of microfinance operations are discussed below.

- **Capital adequacy.** The minimum capitalization requirements for licensed MFIs - S&L companies and Rural Banks - are significantly lower than those for commercial banks and longterm development banks. S&L companies are required to have a paid-up capital of US$50,000 while Rural Banks are required to have US$20,000 in paid-up capital. The solvency standard established by BOG for these licensed financial institutions is unimpaired capital equivalent to at least 6% of risk assets for Rural Banks, and 10% of risk assets for S&L companies. There are indications that a significant number of Rural Banks, and S&L companies have capital adequacy deficiencies - largely because of unfavorable operating guidelines (e.g., on secondary reserves) that had to be adhered to, rapid growth in loan portfolios even as this growth was being accompanied by increases in non-performing loans and inadequate provisioning. Nonetheless, it seems clear that capital adequacy levels need to be reviewed periodically for appropriate adjustments.

- **Mandatory liquidity reserves.** BOG prescribes the primary and secondary reserve assets that licensed deposit-taking institutions are required to hold, relative to an institution's total deposit liabilities. Currently, BOG requires all Rural Banks to maintain a prohibitively high secondary reserve of 52% of deposit liabilities'<sup>2</sup> (but S&L companies are required to maintain a

> _12 For rural banks, the mandatory ratio of primary reserves (cash plus balances with other banks) to total deposit liabilities is 10%, although the actual ratio of primary reserves maintained by rural banks has been much higher -- 27% in 1998 (Source: Bank of Ghana Annual Report, 1998)._

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