Question

a) Some have argued for a higher capital adequacy requirement for microfinance institutions (MFIs). Discuss five (5) justification for this, and explain which of them may be applicable to the Ghanaian situation.

Answer 1

Higher capital adequacy requirements for microfinance institutions is necessary to meet out the requirements of its customers.  

It is justified under the following :

1} it ensures MFIs solvency : if there are sufficient funds to meet out withdrawal requirements of their customers it boosts good financial & banking environment.

2} Ensures that depositors have access to funds : in case of need bank will back them.

3} Set industry standards : as regulatory bodies controls their flow in order to maintain financial market in particular call money market.

4} Evaluation and comparision of institutions : the institutions with higher capital adequacy requirements are more sound in comparision to others.

5} Avoid default : with higher capital these institutions are in better position to meet their customers requirements.

GHANAIAN Situation :- Global capital requirements have swung higher and lower over the years .They tend to increase following a financial crisis or economic recession.

An angry public and uneasy investment climate usually prove to be the catalysts for legislative reform in capital requirements.

At present, in Ghana Microfinance institutions needs higher capital adequacy requirement. So second point is most suitable to the Ghanaian situation.

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