Asset securitization on sustainability …
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Journal of Economic & Financial Studies, 03(04), 73-89
Vol. 03, No. 04: August (2015)
Journal of Economic & Financial Studies
Open access available at http://journalofeconomics.org
The effects of asset securitization on sustainability &
profitability of microfinance institutions in Ghana
Daniel Quacoe a*, Francis Appiah-Kubi Banson b, Jonathan Sakoe c
Department of Business Studies, Graduate School, Wisconsin International University College, Ghana.
Department of Business Studies, Graduate School, Wisconsin International University College, Ghana.
c Department of Finance, University of Mines and Technology, Ghana.
* Corresponding author’s email address:
[email protected]
a
b
ARTICLE INFO
ABSTRACT
Received: 05-07-2015
Accepted: 26-07-2015
Available online: 01-08-2015
Asset Securitization is a process that involves repackaging portfolios of cash-flowproducing financial instruments into securities or tradable capital market instruments
for transfer to investors. There have been a number of studies on asset securitization and
microfinance but most of these studies did not focus on the effects of asset securitization
on sustainability and profitability of microfinance institutions. These studies were
conducted in developed economies and little has been done in Africa and for that matter
Ghana. This study therefore sought to explore the effects of asset securitization on
sustainability and profitability of MFIs in Ghana knowing the important role they play in
the Ghanaian economy. The objectives were to determine whether asset securitization is
being practiced in Ghana, to determine whether asset securitization will improve the
sustainability and profitability of microfinance institutions (MFI’s) as well as challenges
that may arise. As a qualitative research, the case study approach was employed in the
research design. Questionnaires were administered to a sample size of 200 respondents
from a population of 517 who were drawn from the management and staff of five
microfinance companies selected through convenience and purposeful sampling
techniques. The findings are that asset securitization in microfinance is currently not
being practiced in Ghana but if implemented, it will have a positive effect on the
sustainability and profitability of microfinance companies in Ghana. The study identified
some challenges that microfinance institutions may face in the introduction of asset
securitization in Ghana.
Keywords:
Asset securitization;
Marketable security;
Microfinance;
Sustainability & profitability;
Special purpose vehicle.
JEL Classification:
E58; G21; G24; G28.
© 2015 The Authors. This is an open access article under the terms of the Creative Commons Attribution License 4.0, which
allows use, distribution and reproduction in any medium, provided the original work is properly cited.
DOI: http://dx.doi.org/10.18533/jefs.v3i04.162
1.0
Introduction
Microfinance primarily refers to the provision of financial services to low-income individuals and the poor, to
enable them start or expand small businesses. Microfinance was mainly seen as a poverty protecting tool and a
means to reduce poverty and boost the economies of developing countries, it has now become an increasingly
attractive investment opportunity (Basus, 2005). For this reason, Lensink, (2010) states that adding
microfinance funds to a portfolio consisting of international bonds and stocks yields diversification gains.
Furthermore, investors might profit from an additional social return. However, investors deem Microfinance
Institutions (MFIs) to be a very risky industry so all risk averse investors shy away from the industry
(Doreitnera & Pribernya, 2011). For this reason, important innovations have been taking place in the “oldfashioned” business of financial intermediation (The Bond Market Association, 2001). Chief among the
innovations introduced at major banks has been the securitization of balance-sheet assets, which is the
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mechanism by which individual, illiquid financial assets are converted into tradable capital market instruments
(The Bond Market Association, 2001).
Over the last 20 years, the market for asset-backed securities has been growing steadily, swelled by many new
diverse issuers (Kendall, 1996). An asset-backed securities (ABS) transaction is a structured finance product,
where receivables from a designated asset portfolio are securitized in order to create balance sheet liquidity
(Landesbank, 2000). In the U.S., the market for asset-backed securities (ABS) has been an established method of
structured finance (Klotter, 2000), but European asset-backed securities (ABS) only began to display dynamic
growth since the mid-1990s (Böhringer, Lotz, Solbach & Wentzler, 2001). Mortage-backed securities by German
issuers have been an established method of securitizing a homogenous reference portfolio for more than two
centuries (Skarabot, 2002; Anonymous, 1999). Especially since 1995, asset securitization which has seen
dramatic changes as a technique of asset-backed securitization (ABS) has been used by many in the financial
service sector as well as corporations to achieve a more efficient use of capital and return on equity (Bär, 1997;
Laternser, 1997). At the end of 2000, the ABS market had grown six times its size in 1997 which reflected the
growing wish of issuers to parcel assets into portfolios to structure stratified debt claims issued to capital
market investors (Walter, 2000). The strong increase in issuance and trading of asset-backed securitization
(ABS) are often attributed to three causes, i.e. issuer’s desire to manage risk beyond what would be possible
through portfolio diversification, balance sheet restructuring (i.e. to shore up the quality of the balance sheet)
and regulatory capital relief, particularly against the backdrop of weak equity markets and stronger
performance of fixed income markets (Burghardt, 2001). According to Jobst (2002) by the end of 2001 banksponsored loan securitization alone involved over U.S. $200 billion in outstanding securities worldwide, whose
volume accounts for roughly 20 percent of the aggregate credit activities of their sponsors.
Asset securitization is important because, the concept of risk and return suggest that higher risk is associated
with higher return (Fisher & Hall, 1969). Consequently, interest rates in sustainable microfinance institutions
(MFIs) have to be substantially higher than the rates charged on normal bank loans (Rosenberg, Gonzalez, and
Narain, 2010). So the very few investors who have the courage to invest in the industry require extremely high
returns from the MFIs. Also, Hermes and Lensink (2011) state that providing microfinance is a costly business
due to high transaction and information costs. All these put the sustainability and profitability of the
microfinance industry in great doubt. According to rough estimations, only 1-2 per cent of all MFIs in the world
are financially sustainable (Hermes and Lensink, 2011). Since financial markets have displayed a remarkable
shift towards the substitution of securitization of bank assets for traditional loan finance, the issue of debt
securities, collateralized by an underlying portfolio, as a form of structured finance holds the prospect of
completely transforming the traditional paradigm of intermediation (Jobst 2002). In securitization, asset risk is
transferred to capital market investors in return for cash flows generated from an asset portfolio, whose
repayment risk is sliced into tranches, with the most junior tranche (first loss position) bearing any initial losses
(Jobst 2002). In addition, (Jobst 2002) states that this possibility of selling securities as structured claims in the
form of tranches has been key to the popularity of asset securitization. If tranches are subordinated, any losses
in excess of the lower tranche are absorbed by the subsequent tranche and so on, leaving the most senior
tranches only with a remote probability of being touched by defaults in the underlying asset pool (The
Economist, 2002). For the asset securitization process allows issuers to lower their cost of investment funding
by segregating assets in terms of risk. Asset securitization is understood as an important risk reduction tool
according to Skarabot (2002) as well as Rosenthal and Ocampo (1988). The Bond Market Association (2001)
considers securitization as an increasingly important and widely-used method of business financing throughout
the world. Asset securitization gives continued growth and expansion generates significant benefits and
efficiencies for issuers, investors, securities dealers, sovereign governments and the general public (The Bond
Market Association, 2001). The mounting competitive pressure over client deposits and a notorious squeeze on
interest spreads have led banks to employ securitization as a vehicle for balance sheet management (Jobst
2002). Frequently, asset securitization involves more complicated financial structures of packaging the risk of
bank assets (Jobst 2002). The complexity of these structures is rooted in regulatory requirements for insulating
investors against a multiplicity of impending risks arising from credit default (credit risk), an adverse movement
of market prices (market risk) and the inability of the issuer of the security to honor scheduled payment
obligations to investors (liquidity risk) in the wake of a securitization transaction (Jobst 2002).
Prior to formal banking systems in Ghana, many of the poor, mainly women, and in rural communities relied
heavily on informal banking services and the semi-formal savings and loans schemes (Egyir & Akudugu, 2010).
Cooperatives, especially among cocoa farmers of the 1920s, engaged in thrift and credit. The mission of the
informal microcredit organizations or microfinance services in Ghana was to provide social and economic
support for the less advantaged, especially rural women and their families (Botei-Doku & Aryettey, 1996).
Traditionally, people have saved with and taken small loans from individuals and groups within the context of
self-help to start businesses or farming ventures (Addae-Korankye, 2012). Available evidence also suggests that
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the first Credit Union in Africa was established in Northern Ghana in 1955 by Canadian Catholic Missionaries
(Amoah, 2008; Asiamah & Osei, 2007). Microfinance has gone through four (4) distinct phases in Ghana. These
stages are described below: Phase One: The provision of subsidized credit by Governments starting in the
1950’s when it was assumed that the lack of money was the ultimate hindrance to the elimination of poverty.
Phase Two: Involved the provision of micro credit mainly through NGOs to the poor in the 1960’s and 1970’s.
During this period sustainability and financial self – sufficiency were still not considered important. Phase
Three: In the 1990’s the formalization of Microfinance Institutions (MFIs) began. Phase Four: Since the mid
1990’s the commercialization of MFIs has gained importance with the mainstreaming of microfinance and its
institutions into the financial sector. (Ministry of Finance and Economic Planning, 2003). Researchers argue that,
microfinance is not a new concept in Ghana. It has always been common practice for people to save and/or
take small loans from individuals and groups within the context of self-help in order to engage in small
retail businesses or farming ventures. Over the years, the microfinance sector has thrived and evolved into its
current state, thanks to various financial sector policies and programmemes such as the provision of
subsidized credits, establishment of rural and community banks (RCBs), the liberalization of the financial
sector and the promulgation of PNDC Law 328 of1991, that allowed the establishment of different types of
non-bank financial institutions, including savings and loans companies, finance houses, and credit unions etc.
(Asiamah & Osei, 2007). Currently, there are three broad types of microfinance institutions operating in Ghana.
These include: Formal suppliers of microfinance (i.e. rural and community banks, savings and loans companies,
microfinance companies and commercial banks). Semi-formal suppliers of microfinance (i.e. credit unions,
financial non-governmental organizations (FNGOs), and cooperatives; Informal suppliers of microfinance (e.g.
''susu'' collectors and clubs, rotating and accumulating savings and credit associations (ROSCAs and ASCAs),
traders, moneylenders and other individuals). Ghana now has 409 fully licensed microfinance institutions, 92
provisional licensed microfinance, 56 Money Lenders and 7 Financial Non Governmental Organizations (Bank of
Ghana, 2014).The Bank of Ghana has overall supervisory and regulatory authority in all matters relating to
banking and non-banking financial business in Ghana with the purpose to achieve a sound, efficient banking
system in the interest of depositors and other customers of these institutions and the economy as a whole
(Ministry of Finance and Economic Planning, 2003).
There have been several studies on microfinance but not much has been done on the effects of asset
securitization on sustainability and profitability of Microfinance Institutions (MFIs). Hüttenrauch & Schneider
(2009) in their book on securitization: A funding alternative for microfinance institutions, emphasized to what
extent securitization is already a viable funding strategy for MFIs. Alarcón (2008) in studying ''securitization in
microfinance: creating savings and investment instruments for the poor'' explored the viability of implementing
a scheme that pushes the current microfinance structured finance funding strategies one step further, fulfilling
the savings and investing needs of microfinance customers, while helping the development of the financial
markets and the funding issues faced by micro lenders. Hoedoafia & Randall (2013) in a study on ''Restarting
Asset-Backed Securities (ABS) and Current Developments in the Securitization of Financial Assets provide an
insight into how ABS will be conducted in Europe after the recent financial crisis and highlights the
current developments in the securitization of financial assets. The study concluded that there is the need to
attract a new investor base to add to the existing investors and to increase the demand for securitized
products without government interventions. Hoedoafia & Randall (2013) further recommended that a study is
undertaken on how to increase the investor base. It is for this reason that this study to assess the effects of asset
securitization on sustainability and profitability is of great importance because investor base will be expanded if
MFIs are sustainable and profitable. Glaubitt, Hagen, Feist, & Beck (2009) conducted a study on ''Reducing
Barriers to Microfinance Investments: The Role of Structured Finance'' and the research focused on the two
areas of structured finance most relevant for microfinance: asset securitization and structured investment funds.
Hans Bystr¨om (2006) in studying ''The Microfinance Collateralized Debt Obligation: a Modern Robin Hood?''
discussed the implications of securitization and trenching of micro credits. Although there have been a number
of studies conducted on asset securitization and microfinance as indicated above, most of these studies did not
focus on the effects of asset securitization on sustainability and profitability of microfinance institutions. Also,
the studies were conducted in developed economies and little has been done in Africa and for that matter Ghana.
The uniqueness of this study therefore seeks to explore the effects of asset securitization on sustainability and
profitability of MFIs in Ghana knowing the important role they play in the Ghanaian economy.
This study aims at deepening the understanding of microfinance practitioners and policy makers on the use of
asset securitization in the microfinance industry which can improve on the sustainability and profitability of the
microfinance industry in Ghana. The research objectives are to determine whether asset securitization is being
practiced in Ghana, to determine if the use of asset securitization can improve the sustainability of microfinance
companies in providing microfinance services to their clients, to determine if the use of asset securitization can
improve profitability for microfinance companies and to identify the challenges that may come in the use of
asset securitization in microfinance.
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2.0
Literature review
2.01
History of asset securitization
Daniel et al., JEFS (2015), 03(04), 73–89
Asset Securitization is a process that involves repackaging portfolios of cash-flow-producing financial
instruments into securities for transfer to third parties (Jobst, 2008). In simple terms, asset securitization is a
technique used to sell illiquid balance sheet assets to outside investors (Bessis, 2002). Through this process
homogenous illiquid financial assets are pooled and repackaged into marketable securities (Dash, 2010). “In a
basic securitization structure, an entity, often a financial institution and commonly known as a “sponsor,”
originates or otherwise acquires a pool of financial assets, such as mortgage loans, either directly or through an
affiliate. It then sells the financial assets, again either directly or through an affiliate, to a specially created
investment vehicle that issues securities “backed” or supported by those financial assets (Dash, 2010).
Securitization issues backed by consumer-backed products such as car loans, consumer loans and credit cards,
among others are called asset-backed securities (Moody’s Investors Service, 2002). Asset securitization is one of
the most significant innovations in the global capital markets during the last fifteen years. It has substantially
enhanced the efficiency of assets and liabilities by individuals and corporations in recent times (Standard and
Poor’s, 2000). Choudhry and Fabozzi (2004) mention that the capital market in which these securities are issued
and traded consists of three main classes: asset-backed securities (ABS), mortgage-backed securities (MBS), and
collateralized debt obligations (CDO). As a rule of thumb, asset securitization issues backed by mortgages are
called MBS, and securitization issues backed by debt obligations are called CDO (Nomura, 2004 and Fitch
Ratings, 2004).
Asset securitization began in the 1970s, created as a vehicle to provide additional mortgage credit to the
residential housing market. At that time, savings and loan associations, or “thrifts,” were the predominant
originators of mortgage loans (Nera Economic Consulting, 2009). Starting around 1990, pools of loans began to
be sold in capital markets, by selling securities linked to pools of loans held by legal entities called “special
purpose vehicles” (SPVs) intermediaries (Yale, Nber & Metrick, 2011). These securities, known as asset-backed
securities (ABS) or mortgage-backed securities (MBS), in the case where the loans are mortgages are claims to
the cash flows from the pool of loans held by the SPV. For decades before that, banks were essentially portfolio
lenders; they held loans until they matured or were paid off. These loans were funded principally by deposits,
and sometimes by debt, which was a direct obligation of the bank (rather than a claim on specific assets) (Nera
Economic Consulting, 2009). But after World War II, depository institutions simply could not keep pace with the
rising demand for housing credit. Banks as well as other financial intermediaries sensing a market opportunity,
sought ways of increasing the sources of mortgage funding. To attract investors, investment bankers eventually
developed an investment vehicle that isolated defined mortgage pools, segmented the credit risk, and structured
the cash flows from the underlying loans. Although it took several years to develop efficient mortgage
securitization structures, loan originators quickly realized the process was readily transferable to other types of
loans as well (Comptroller's Handbook, 1997). Since the mid-1980s, better technology and more sophisticated
investors have combined to make asset securitization one of the fastest growing activities in the capital markets.
The growth rate of nearly every type of securitized asset has been remarkable, as have been the increase in the
types of companies using securitization and the expansion of the investor base (Comptroller's Handbook 1997).
The business of a credit intermediary has so changed that few banks, thrifts, or finance companies can afford to
view themselves exclusively as portfolio lenders (Dugan and John, 1997). Asset Securitization has grown from a
non-existent industry in 1970 to $6.6 trillion as of the second quarter of 2003 (Cowan, 2003).
2.02
Effects of securitization on microfinance institutions' sustainability and profitability
Due to the importance of MFIs in poverty reduction, their sustainability is of essence to all stakeholders. For this
reason, Walter (2002) argues that it is now time to innovate and design services that maintain high standards of
financial performance because clients place a high value on continued access to credit, and if they feel that the
MFIs will not survive they reduce their incentive to repay loans (Von Pischke, 1999). Irrespective of this
importance of MFIs, Markowski (2002) estimates that only about 5% of MFIs worldwide are financially
sustainable while the IMF (2005) puts the figure at only 1%, so this is a huge concern for the microfinance
sector.
To address this huge concern of only 5% or less MFIs being financially sustainable, Havers (1996) states that an
MFI must cover the cost of funds which he defines as operating costs, loan write-offs and inflation with the
income it receives from fees and interest. MFIs that have become self-sustainable tend to be larger and more
efficient. They also tend not to target the very poor, as targeting the less poor leads to increases in loan size and
improved efficiency indicators, whereas MFIs focusing on the poorest tend to remain dependent on donor funds
(IMF 2005). This is where the compromise exists. In order to achieve such sustainability, while at the same time
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reaching those most in need, microfinance programmes need to be managed in a rigorous and professional
manner, subsidies must be removed, tight credit control procedures and follow-up on defaulters needs to be in
place (Havers, 1996). In simple terms, the tradeoff between financial and social objectives can be balanced if the
MFI is well managed and understands the market and its clients (Morduch, 2004) and by combining both
objectives, financial returns can potentially be increased in the long run (Pawlak & Matul, 2004). As stated by
Morduch (2004) “achieving profitability and strong social performance is the ultimate promise of microfinance.
It is not impossible but neither is it easy”. It is said that if the MFI’s want to close in this huge supply‐demand
gap, they need to tap into external resources. To achieve this, important technological changes have been taking
place in the “old-fashioned” business of financial intermediation (Diekmann, 1997). Chief among the innovations
introduced at major banks has been the securitization of balance-sheet assets, the mechanism by which
individual, illiquid financial assets are converted into tradable capital market instruments (The Bond Market
Association, 2001). There are several effects of securitization on MFI’s especially on sustainability and
profitability. For MFI’s to be sustainable Havers (1996) states that an MFI must cover the cost of funds,
operating costs, loan write-offs and inflation with the income it receives from fees and interest. Shah (1999)
argues that the concept of sustainability must include, amongst other criteria; obtaining funds at market rate
and mobilization of local resources. Shah proposes sustainability measures that include among others:
repayment rate, operating cost ratio, market interest rates and portfolio quality. The microcredit summit
campaign, on the other hand refers to a microfinance institution as institutional and financially Self-Sufficient if
it is able to cover all actual operating expenses from income generated from its financial services operations,
after adjustment for inflation and subsidies (Gibssons & Meehan, 2000). According to Sharma and Nepal (1997),
a microfinance institution attains sustainability when its operating income from loans is sufficient to cover all
the operating costs. The researchers argue that sustainability of microfinance institutions includes both financial
viability and institutional sustainability (self-sufficiency) of the lending institution. They again stated that
charging high enough interest rate to cover costs is an essential practice for any business enterprise that intends
to continue its operations beyond the short-term. Asiama & Victor-Osei (2007) emphasize that the potential
economic benefits of sustainable microfinance in Ghana are compelling, and its potential effects on the
development process cannot be understated. In line with this idea (Navajas et al., 1998) define sustainability as
"to reach goals in the short-term without harming your ability to reach goals in the long-term." Similarly,
Edgcomb and Cawley (1994) define sustainability as the ability of an organization to "sustain the flow of valued
benefits and services to its members or clients over time." Both sets of authors, however, later clarify their
remarks to make clear that, in their view, the only way an MFI can become truly "sustainable" is to reach
financial self-sufficiency. This calls for a holistic approach to facilitate the development of the microfinance sub
sector and thereby unleash its potential for accelerated growth and development. This is because sustainable
access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to
school, enabling families to obtain health care, and empowering people to make the choices that best serve their
needs (Kofi Annan, 2003).
Edgcomb and Cawley (1994) for example, argue that "sustainable institutions can and must meet 100 percent
auto financing for their credit operations." Brinkerhoff (1991) propose the following definition of sustainability:
"Sustainability can be defined as the ability of a programme to produce outputs that are valued sufficiently by
beneficiaries and other stakeholders that the programme receives enough resources and inputs to continue
production." This definition transforms the debate about sustainability, for it opens the very real possibility that
an MFI could be viable in the long-term, despite dependence on donor funding. This definition also requires that
MFI’s recast the way they think about donors. It is stated that all economic actors are assumed to be rational,
with the important exception of donors. In the institution’s literature, donors are portrayed as motivated almost
solely by "irrational" impulses: donors are fickle, donors are faddish, and donors are unreliable. The possibility
that there exist rational donors who seek to maximize social returns on social investments is rarely, if ever,
allowed (Brinkerhoff, 1991). He argues that donors are as rational as any other economic actor is. It is true that
donors can at times be fickle, faddish, and unreliable. But it is by no means certain that rational donors in
particular, governments who "remain committed to poverty alleviation well after international agencies have
moved on to the next Big Idea" will abandon microfinance "if subsidized, microfinance proves to deliver more
banks for buck than other social investments" (Brinkerhoff, 1991). Again, that so many MFIs and other
nonprofits have survived and thrived for so long would appear to be like the rather sweeping assertion that
institutional sustainability requires financial self-sufficiency (Morduch, 1998).
However unlike formal sector financial institutions, the large majority of MFI’s are not sustainable (Brau &
Woller, 2004). Instead, most MFI’s are able to operate without covering their costs due to subsidies and gifts
from governments and other donors (Morduch, 2000). Notwithstanding, it is true that donor funds are limited,
and it is true that donors can be fickle, faddish, and unreliable (Brau & Woller, 2004). Magali (2014) took a study
that applied the qualitative, descriptive and multivariate regression analysis to investigate whether the rural
Savings and Credits Cooperative Societies (SACCOS) in Eastern, Central and Northern zones of Tanzania were
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still sustainable after the phasing out of capacity building projects in 2013. The study also examined the
outreach level of the rural SACCOS since their establishment. The study revealed that 46% of SACCOS in rural
Tanzania especially in Eastern and central zone were not sustainable because they accumulated large amount of
non-payment loans and they did not issue new loans from 2006-2013. This means, a significant number of MFI’s
need a sustainable technique to microfinance business. Thus, it is not surprising that promoters of sustainable
microfinance have emphasized the need for MFIs to adopt asset securitization (Sharma and Nepal, 1997).
Also, the recent controversy over Microfinance Institutions (MFIs) charging usurious interest will create
obstacles for funds flowing freely from banks to the MFI sector and that will put additional pressure on financing
the MFI’s balance sheets (Dalal, 2010). For this reason, Stieber (2007) advocates the use of alternate sources for
capital acquisition for MFIs. Also, Asset securitization has been recognized by eminent academics as the most
important engine of reform in modern financial system to emerge in recent times (Greenbaum & Thakor, 1995).
Research scholar, Deihl (2009) again argues that using securitization transactions would allow microfinance
institutions to obtain greater amounts of funding from local and international investors. Stieber (2007) argues
that in April 2006, Blue Orchard executed the largest single commercial investment transaction in the history of
microfinance. The transaction raised $99 million for twenty-one microfinance institutions in thirteen different
countries and five different currencies. In its view, The Bond Market Association (2001) states that chief among
the innovations introduced at major banks has been the asset securitization of balance-sheet assets, the
mechanism by which individual, illiquid financial assets are converted into tradable capital market instruments.
Asset Securitization is therefore necessary to ensure continue funding for microfinance operations (Dalal, 2010).
So the evolution of asset securitization is not surprising given the benefits that it offers to each of the major
parties in the transaction.
Some of the major participants are the originator (MFI), the investor, and the borrower (Comptroller's
Handbook, 1997). One of the main benefits of an MFI utilizing asset securitization techniques is that it gives
access to low-cost capital that is otherwise unavailable through conventional means (Schwarcz 2010). A
company’s ability to borrow in its own name is limited by the market’s view of its credit rating. The higher the
credit rating a company has, the easier it will find it to access the wholesale funding market, and the cheaper that
funding is likely to be (Standard & Poor’s, 2005). Capital One is currently rated at BBB-by Standard and Poor’s, a
leading credit rating agency, which is at the lower end of the credit rating continuum and severely limits its
ability to borrow funding in its own name (Standard & Poor’s, 2005). So for the originator of the microfinance
assets, the advantages of securitization include relief in regulatory and economic capital, diversification of the
investor base, access to new (and potentially cheaper) sources of funding based on asset risk rather than
corporate risk and portfolio management (Comptroller's Handbook, 1997). Because of credit enhancements, the
rating of asset-backed securities is often higher than that of the originator who is therefore able to tap funding
sources not normally accessible to him (Basel Committee, 1992). According to Saunders and Cornett (2006),
asset securitization along with other financial derivatives, the packaging and selling of loans and other assets
backed by securities, is a mechanism that financial institutions use to hedge their interest rate exposure gaps.
From the perspective of the credit originator, this market enables them to transfer some of the risks of
ownership to parties more willing or able to manage those (Saunders & Cornett, 2006). By doing so, originators
can access the funding markets at debt ratings higher than their overall corporate ratings, which generally gives
them access to broader funding sources at more favorable rates. By removing the assets and supporting debt
from their balance sheets, MFIs are able to save some of the costs of on-balance-sheet financing and manage
potential asset-liability mismatches and credit concentrations (Comptroller's Handbook, 1997). Rating analysis
and market based pricing also create credit history that may enable the originator to raise future capital at
market-linked rates (Fernandes, 2006). In effect, it helps the originator to manage the Balance Sheet, unlocking
hidden values, managing asset liability mismatch and managing various types of risk including currency risk,
commodity risk and interest rate risk. Asset Securitization also improves returns on capital by converting an onbalance-sheet lending business into an off-balance-sheet fee income stream that is less capital intensive.
Depending on the type of structure used, asset securitization may also lower borrowing costs, release additional
capital for expansion or reinvestment purposes, and improves asset/liability and credit risk management
(Comptroller's Handbook, 1997). In addition Basu (2005) posits that issuers who frequently use securitizations
as a funding tool often find their profits increasing because the securities generally generate a profit when they
are sold. Securitized assets offer a combination of attractive yields (compared with other instruments of similar
quality), increasing secondary market liquidity, and generally more protection by way of collateral overages
and/or guarantees by entities with high and stable credit ratings. Also, from an investor’s perspective, asset
securitization offers an alternative investment medium which for a given rating level usually over a safer
investment avenue and higher risk adjusted return compared to equivalent related bank and corporate debts
(Deihl, 2009). Investors prefer securitization transactions because they are rated based on standardized reviews
of relevant information through rating agencies. Thus, highly rated securities require that investors do minimal
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additional research in order to become comfortable with the investment. The researcher further emphasize that
asset securitization also gives the investors the desired exposure in some asset classes where ordinarily they
can‘t invest directly (Deihl, 2009). Additionally, banks that raise funds through securitization are able to reduce
their regulatory, and sometimes economic, capital requirements. They also offer a measure of flexibility because
their payment streams can be structured to meet investors’ particular requirements. Most important, structural
credit enhancements and diversified assets pools free investors of the need to obtain a detailed understanding of
the underlying loans. This has been the single largest factor in the growth of the structured finance market
(Comptroller's Handbook, 2001). Lastly, asset securitization can have an impact on an issuers cost of funds. This
is because financial assets with predictable payment characteristics can, when pooled together, offer a more
attractive risk and return profile to investors' than the credit of the company that originated them (Koppe,
Loewer-Sieger, & de Roever-Bonnet, 1986).
Borrowers also benefit from the increasing availability of credit on terms that lenders may not have provided
had they kept the loans on their balance sheets. For example, because a market exists for mortgage-backed
securities, lenders can now extend fixed rate debt, which many consumers prefer over variable rate debt,
without over exposing themselves to interest rate risk. Securitized asset also offer a measure of flexibility
because their payment streams can be structured to meet investors’ particular requirements (Comptroller's
Handbook, 1997). Asset securitization can be efficiently used to enable risk transfer by isolating risks and
allocating them to entities best equipped to take them on (Ananth & Sahasranaman, 2011). Many MFIs have thus
adopted cost recovery interest rates on microcredit. A significant number of such institutions have been able to
expand the depth and breadth of their operations and effective interest rates are even higher because of
commissions and fees charged by MFI’s (Comptroller's Handbook, 1997).
Most of the reasons for using securitization in microfinance are the same explored in the mainstream financial
sector on Banking Supervision (Basel Committee, 2011). Securitization would help MFIs to broaden their access
to financing, increasing liquidity and diversify funding (Lockwood, Rutherford & Herrera, 1996). In particular, it
is often claimed that the portfolio of microloans, by its separation from the other assets of the MFI (and, thus, its
creditworthiness), the empirical literature generally agrees on the positive effects of securitization on banks
profitability. By using the event study methodology, these wealth effects are signalled by the existence of
abnormal returns as a consequence of securitization announcements observing a sample of 294 public offering
of securitized assets in U.S. during the period 1984-1992, focused on the wealth effects of announcements of
asset securitization. By using the event study methodology, the authors demonstrate that the effects of the
announcements are industry specific (Herrera et al., 1996). When banks are considered, the study shows that
banks realized wealth loss at the time of ABS announcement. Furthermore, the researchers demonstrate that the
wealth change is positively related to financial slack for banks and that strong (high financial slack) banks
experienced significant wealth gain, whereas weak (low financial slack) banks experienced significant wealth
loss (Herrera et al., 1996). Also, Thomas (1999) studied the wealth change of 236 securitizations carried out in
U.S. during the period 1991-2006. The author analyses the abnormal returns and finds that securitization is
wealth creating for stockholders, whereas is not wealth destroying for bondholders. A firm is said to be
profitable if its total revenue is greater than its total cost. Elks (2013) find increased profit for companies
embracing sustainability. López-Martínez et al., (2009) examine the reactions of the Spanish stock market to the
announcement of securitization by listed banks during the period 1993-2004. Their results show the existence
of significant excess returns on the day immediately following the notice of a securitization deal; results are
robust to different tests conducted using different intervals around the event date. These findings are consistent
with the idea that investors anticipate the potential benefits of the securitization in terms of free up equity,
which allows banks to improve their profitability (López-Martínez et al., 2009). Sabry and Okongwu (2009)
demonstrate that in the U.S. context, securitization has increased the availability of credit and decreased its cost
and therefore increased profit. In addition, Basu (2005) argues that issuers who frequently use securitizations
as a funding tool often find their profits increasing because the securities generally generate a profit when they
are sold. Securitized assets offer a combination of attractive yields (compared with other instruments of similar
quality), increasing secondary market liquidity, and generally more protection by way of collateral overages
and/or guarantees by entities with high and stable credit ratings. They also offer a measure of flexibility because
their payment streams can be structured to meet investors’ particular requirements (Comptroller's Handbook,
1997). Other factors-such as the compulsory deposits for obtaining a loan, frequency of repayments, and the
systems adopted to collect repayments also raise the effective interest rates (Fernando, 2006).
The intent of securitization typically is to ensure that repayment of the securities issued to investors is
dependent upon the securitized assets and therefore will not be affected by the insolvency of any other party
including the entity securitizing the assets. Also, most securitization issues are rated by an accredited credit
rating agency. Securitization has two important characteristics (Dash, 2010). First, the pooling of a large number
of assets, such as loans, that are used as collateral for (asset‐backed) securities issued by the originating firm,
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and, second, the de‐ linking of the credit risk of the pool of assets from the credit risk of the originating firm . The
de‐linking is typically done through a transfer of the underlying assets to a stand‐alone special purpose vehicle
(SPV) that is closely associated with, but legally de‐coupled from, the originator. The SPV is then issuing
securities backed by the underlying assets. To highlight the risk‐transferring idea behind securitization, the
asset‐backed securities in a securitization deal are sometimes called pass‐through instruments (Dash, 2010). To
sustain the growth in the microfinance industry, it is necessary to shift the loan financing for MFI’s from
traditional lenders to capital markets. This can primarily be achieved through asset securitization. Asset
securitization has different advantages to offer which can be tapped separately and also customized on a
case‐by‐case basis and apart from the domestic commercial investors, foreign market debt can also be tapped
for the funding needs of the MFIs (Patten et al., 2001).
2.03
Major players in asset securitization
There are four major players in asset securitization processes namely; the Obligor, Originator, Special Purpose
Vehicle (SPV), and the Investor.
The Obligor (Loan Client or Debtor)
Originator (Microfinance
Institution)
Special Purpose Vehicle
(An institution selling Securities)
The Investor (Buyer of securities)
2.3.1
Obligor(s)
The Obligor is the Originator‘s debtor. In this context, the Obligor(s) is the total number of loan clients of AGT
microfinance. The amount outstanding from the Obligor is the asset that is transferred to the SPV. The
amount outstanding to the AGT loan clients are transferred to GCB, the SPV. The credit standing of the Obligor(s)
is of paramount importance in a securitization transaction (Dash, 2010). This is where rating agencies come in
by providing the credit rating of the obligor. This will inform the SPV if the obligor will be able to honour
repayment schedules before it accept a deal from the originator.
2.3.2
Originator
This is the entity which requires the financing and hence drives the deal. Typically the Originator owns the
assets or cash flows around which the transaction is structured . The Originator sells the loan portfolio to the
Special Purpose Vehicle (SPV) (Dash, 2010). In the context of this study, an Originator could be African Guaranty
Trust (AGT) Microfinance Ltd who owns an outstanding loan portfolio around which the transaction is
structured. The expected cash flows from the loan portfolio are sold to the Special Purpose Vehicle (SPV). This
provides funds ready available to the originator to loan out to other clients and whenever the expected cash
flows are received from the obligor, they are then transferred to the SPV who now owns them.
2.3.2
Special purpose vehicle (SPV)
A SPV is typically used in a structured transaction for ensuring bankruptcy remoteness from the Originator.
In the context of this study, the SPV which can be a bank, example, Ghana Commercial Bank (GCB), or Gold Coast
Securities Limited which purchases the loan portfolio from the Originator, African Guaranty Trust (AGT)
Microfinance Ltd. Typically the ownership of the cash flows or assets around which the transaction is structured
is transferred from the Originator, African Guaranty Trust (AGT) Microfinance Ltd, to the SPV, Ghana
Commercial Bank, etc. at the time of execution of the transaction. The SPV is typically an entity with narrowly
defined purposes and activities and usually has independent trustees/directors. The purpose of the SPV is to
ensure that the loan portfolio is transferred from the Originator to bankruptcy remoteness. The SPV, that is GCB
in the context of this study, needs to be capital efficient. The SPV then sells these securities to investors who
want to make to a return on their investment on maturity of the investment.
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2.3.4
Daniel et al., JEFS (2015), 03(04), 73–89
Investors
The investors are the providers of funds and could be individuals or institutional investors like banks,
financial institutions, mutual funds, provident funds, pension funds, insurance companies, etc. The investors
also purchase the securities from the SPV, thus GCB etc. based on their risk appetite (Dash, 2010). With this
arrangement, the investors are confident that, even if the Originator AGT in this context goes bankrupt or
becomes illiquid, the loan portfolio is in the name of the SPV- GCB in this study, which is capital efficient. The
concept of risk and return suggest that, higher risk is associated with higher return (Fisher & Hall, 1969).
Therefore with this lower risk presented by the Originator or the MFI or AGT microfinance, investors will
require lower return.
3.0
Data and methodology
The study was an exploratory survey to assess the effects of asset securitization on sustainability and
profitability of microfinance companies. The study concentrated on five microfinance companies in the Greater
Accra region with a total population of 517. The choice of the region is due to the fact that it is accessible to the
researcher taking into consideration time and cost elements. Convenience and purposive sampling methods
were used to arrive at the sample size of the 200 made up of management level and above from a population of
517. These methods were used because the researcher wanted to get access to the needed data readily and
overcome time and financing constraints. Both primary and secondary data were used as well as interview
guide. Questionnaires totaling 200 were administered to respondents. Secondary data was also obtained from
relevant publications and other materials. Statistical package for social sciences (SPSS) was used in data
analysis.
4.0
Results and discussion
4.01
Level of education of respondents
Asked to indicate their educational background, the results are presented in table 01. In terms of educational
level of the respondents, as of the time of study, all of them have had more than just basic education; 59.0%
have had Higher National Diploma/Diploma studies, with 37.0% having their degrees whereas 4.0.3% have had
post graduate education. From this, it could be deduced that all the respondents hold educational certificates of
higher learning and therefore can comprehend the issues in the questionnaire and express a fair view on the
subject of this research. This is because their understanding of the subject matter of this research is key to
making an informed decision.
Table 01: Level of education of respondents
Level of Education
Number of Respondents
Percentage
HND/Diploma
118
59.0
First Degree
Master’s Degree
74
8
37.0
4.0
200
100.0
Total
4.02
Years of experience of respondents
Respondents were again asked of their working experience in the microfinance sector, and their responses are
presented in table 02. In terms of working experience, majority of the sampled MFIs (about 66.5%) had been
operating for over years three (3) years. Only about 13% of the sampled MFIs have been in operation for less
than two years. This means majority of the respondents have enough working experience in the industry and are
conversant with the business of microfinance to give a fair judgment of the issues rose in the questionnaire.
Table 02: Level of experience of respondents
Years of experience
Number of Respondents
Percentage
Less than 2 years
26
13.0
Between 2 to 3 years
Between 3 to 4 years
Above 5 years
41
60
73
20.5
30.0
36.5
Total
200
100.0
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Asset securitization on sustainability …
4.03
Daniel et al., JEFS (2015), 03(04), 73–89
Knowledge or idea in asset securitization
Asked if respondents had any knowledge or idea in asset securitization, the responses are presented in table 03.
Majority of the respondents 68% did not have any idea about the concept of “asset securitization in
microfinance”. This shows that most microfinance practitioners in Ghana are not aware of the concept of asset
securitization. This means Ghanaian MFIs are way behind in the implementation of the concept of asset
securitization. These show stakeholders need serious education on asset securitization to be able to appreciate
the concept.
Table 03: Knowledge or idea in asset securitization
Knowledge or idea in asset
securitization
Number of Respondents
Percentage
Yes
56
28.0
No
136
68.
Neutral
Total
4.04
8
4.0
200
100.0
Existence of asset securitization in microfinance in Ghana
Asked to indicate if Asset Securitization in Microfinance exists in Ghana, the result is presented in table 04.
Majority 62% of respondents did not know whether or not asset securitization in Microfinance exists in Ghana
because they do not have any idea on the concept. 38% indicate the concept does not exist in Ghana. However, a
crosscheck at Ghana Association of Microfinance Companies (GAMC) and a check at the regulator of the
Microfinance industry, the Bank of Ghana, confirm that asset securitization in Microfinance does not exist in
Ghana. These show stakeholders will need serious education on asset securitization before it can be
implemented as a policy without which practitioners and investors may find it difficult to adopt.
Table 04: Existence of asset securitization in microfinance Ghana
Existence
of
asset
securitization in Ghana
Number of Respondents
Percentage
No
76
38.0
Neutral
124
62.0
Total
200
100.0
Yes
4.05
Willingness to engage in special purpose vehicles
Asked if the respondents were willing to engage in Special Purpose Vehicles (SPV) and transfer or sell their loan
portfolios to investors through the SPVs in other to undertake the asset securitization on behalf of their
respective microfinance institutions, the responses were positive as presented in table 06. Having understood
the process of asset securitization, majority 79% of the respondents expressed their willingness to engage in
SPV’s and transfer or sell their loan portfolios to the SPV’s in other to undertake the asset securitization on
behalf of their respective microfinance institutions. This is an indication that when practitioners are fully
educated on the concept of asset securitization, they will fully embrace it to enhance the microfinance industry
in Ghana.
Table 05: Willingness to engage in SPVs
Willingness to engage in
SPVs
Number of Respondents
Percentage
Yes
158
79.0
No
36
18.0
Neutral
6
3.0
200
100.0
Total
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Asset securitization on sustainability …
4.06
Daniel et al., JEFS (2015), 03(04), 73–89
Loan portfolio package into marketable securities
To confirm their position on asset securitization in microfinance, respondents were asked if they will want to
pool their loan portfolio and repackage them into marketable securities so that investors can invest their
company using the repayment from the loan portfolio as security for their investment. The responses are
presented in table 06. Having understood the concept, a whopping majority of 80% of the respondents were
willing to sell their loan portfolio to be repackaged into marketable securities so that investors can invest in
their company using the cash inflows from their respective loan portfolio as securities for the investment. This
will boost investor confidence knowing that their investments are well secured. Investors have nothing to worry
about because when their investment mature they will be paid by the SPVs and SPVs will also be paid by the
repayments from the MFIs loan clients.
Table 06: Loan portfolio package into marketable securities
Loan portfolio package into
marketable securities
4.07
Number of Respondents
Percentage
Yes
160
80.0
No
30
15.0
Neutral
10
5.0
Total
200
100.0
Guaranteed cash inflow
Asked if respondents will want their cash inflow from their loan portfolios guaranteed, the following results
presented in table 05 were received from the respondents. Majority of 95% of respondent prefer their cash
inflow from their loan portfolios guaranteed. The researcher deduce that, asset securitization guarantee the cash
inflow from the loan portfolios of the microfinance institutions. The researcher can therefore also deduce that
the Microfinance institutions who will want their cash inflows guaranteed and will also want to subscribe to
asset securitization. The fact is that once the MFIs subscribe to asset securitization and investors also invest in
these securities, there will be enough funds to available to MFIs to grant more loans. Policy makers should look
at the important role of MFIs in Ghana’s financial sector and consider this concept as an alternative source for
MFIs to raise funds for their operations.
Table 07: Guaranteed cash inflow
Guaranteed cash inflow
4.08
Number of Respondents
Percentage
Yes
190
95.0
No
10
5.0
Total
200
100.0
Impact of securitization on sustainability of a MFI
Asked if their respective microfinance companies will be more sustainable if they employed the use of asset
securitization in their companies, the result is presented in the table 08. Having understood the concept, 87% of
the respondents believed their companies will be more sustainable if they employ asset securitization. Since
investors are going to invest in securities from SPVs and SPVs also buying theses securities from MFIs, there will
funds for MFIs to run their operations thereby making them more sustainable. Liquidity may not be much of a
problem to MFIs when they subscribe to asset securitization and may not need to wait to receive repayments
from loan clients before granting new loans. This is all because asset securitization defuses potential investors
fear that they will lose their investments if the microfinance company becomes illiquid due to the high default
rate.
Table 08: Impact of securitization on sustainability of MFIs
Impact of securitization
sustainability of MFIs
on
Number of Respondents
Percentage
Yes
174
87.0
No
20
10.0
Neutral
Total
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3.0
200
100.0
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Asset securitization on sustainability …
4.09
Daniel et al., JEFS (2015), 03(04), 73–89
Impact of securitization on the profitability of a MFI
Asked if their respective microfinance companies will be more profitability if they employ the use of asset
securitization in their company, the result is presented in table 09. Majority of respondents 83.5% believe their
profitability levels will increase because of asset securitization. Since the concept will make them more liquid to
grant more loans, their asset base will increase which will yield more interest income and fees from processing
charges. With all other factors being constant their profit levels will surely increase. This is a strong conviction of
the respondents that asset securitization leads to profitability.
Table 09: Impact of securitization on the profitability of MFIs
Impact of securitization on the
profitability of MFIs
Number of Respondents
Yes
167
83.5
No
26
13.0
Neutral
7
3.5
200
100.0
Total
4.10
Percentage
Challenges of asset securitization
Respondents were asked of the challenge(s) that may impede asset securitization in microfinance in Ghana,
their responses are presented below. Majority 71% of the respondents having understood the concept of asset
securitization in microfinance believes they will face two or more challenges if they were to securitize their loan
portfolio. They listed some of these challenges as the lack of the right and adequate infrastructure on asset
securitization, lack of the right regulation, lack of sophisticated or adequate supervision and rating agencies, lack
of the right control over co-mingling of cash flows from loan repayment and other sources etc.
Table 10: Challenges of asset securitization
Challenges
of
securitization
4.11
asset
Number of Respondents
Percentage
No challenge
7
3.5
One challenge
51
25.5
Two or more challenges
142
71.0
Total
200
100.0
Discussion of key findings
This study reveals that, asset securitization in microfinance have not been employed in the microfinance
industry in Ghana, therefore majority of the microfinance management have no idea on the asset securitization
concept. However, Frost (1997) states that over the last several decades asset securitizations have become an
increasingly conspicuous part of the international financial marketplace. This means the Ghanaian MFIs have
been left behind in the implementation of the concept of asset securitization. Meanwhile, it is necessary to shift
the loan financing for MFIs from traditional lenders to capital markets and this can primarily be achieved
through securitization (Dash, 2010). Also, Stieber (2007) advocates the use of alternate sources for capital
acquisition for MFIs. In seeking for this alternate funding, this study reveals that the various microfinance
companies in Ghana are willing to embrace the asset securitization concept as an alternate source of capital.
Majority 80% of the respondents were willing to undertake asset securitization process of selling their loan
portfolio to be repackaged into marketable securities so that investors can invest in their company using the
cash inflows from their respective loan portfolio as securities for the investment. Dugan and John (1997)
confirm the position of the respondents by stating that business of a credit intermediary has so changed that few
banks, thrifts, or finance companies can afford to view themselves exclusively as portfolio lenders. In the same
light, Greenbaum and Thakor (1995) state that asset securitization has been recognized by eminent academics
as the most important engine of reform in modern financial systems to emerge in recent times. It is therefore
undisputable that asset securitization will make the Ghanaian microfinance sector more profitable.
The study again reveals that, most microfinance institutions (MFIs) in Ghana are self sustainable and MFIs
believe that they will be more sustainable if they employ the use of asset securitization in the microfinance
industry. Having understood the concept 87% of the respondents believed their companies will be more
sustainable if they employ asset securitization. The costs of carrying out microfinance business are usually high
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Daniel et al., JEFS (2015), 03(04), 73–89
relative to the value of loans and deposits involved. These costs include the administrative costs of making
payments, keeping open offices, cost of loan monitoring, etc. (IMF, 2002). According to Sharma and Nepal
(1997), a microfinance institution attains sustainability when its operating income from loans is sufficient to
cover all the operating costs. They argue that sustainability of microfinance institution includes both financial
viability and institutional sustainability (self-sufficiency) of the lending institution. This is an indication that the
most microfinance companies in Ghana will be more sustainable with asset securitization. The sustainability of
MFIs in Ghana is a friendly environment to promote asset securitization since the MFIs will be in a position to
generate enough inflows to settle their obligations via the Special Purpose Vehicles.
The study also finds that, microfinance in Ghana will be more profitable if they embrace the use of asset
securitization. Having understood the concept, majority of respondents 83.5% believe their profitability levels
will increase because of asset securitization. This position is consistent with Elks (2013) who finds increased
profit for companies embracing asset securitization. This happens as a result of the availability of excess funds to
loan out to needed clients due to funds provided by the SPV because of asset securitization. As more clients are
served due to availability of funds, profits margins will increase with all other factors held constant.
Finally, the study identified the challenges that microfinance companies may face in the implementation of asset
securitization in Ghana. Having understood the securitization concept, majority 71% of the respondents believes
they will face two or more challenges if they were to securitize their loan portfolio. They listed some of these
challenges as the lack of the right and adequate infrastructure on asset securitization, lack of the right regulation
on asset securitization, lack of sophisticated or adequate supervision and rating agencies, lack of control over comingling of cash flows from loan repayment and other sources etc. These views are consistent with Macchiavello
(2012) who state that a considerable amount of regulatory risk is involved: lack of regulation on securitization,
incertitude on the true sale effect, bankruptcy remoteness and priority among creditors lack of sophisticated or
adequate supervision, rating agencies and transparency standards. Rozas and Kothari (2010) also stated that
some of the arguments against asset securitization in microfinance are well reasoned out such as the lack of
control over co-mingling of cash flows and lack of regulatory supervision on bilateral assignments.
5.0
Conclusion and policy implications
The first research objective was to determine whether asset securitization is being practiced in Ghana. The study
revealed that the concept is currently not practiced in the country and as a result most practitioners are not
aware of the concept. The second was to determine if the use of asset securitization can improve the
sustainability of microfinance companies. According to the study, asset securitization will improve the
sustainability of microfinance companies in providing microfinance services to their clients. As a result, a
whopping majority of 87% of respondents gave their support for the concept of asset securitization in
microfinance to be institutionalized in Ghana so that they can patronize it. This is all because asset securitization
defuses potential investors’ fear that they will lose their investments if the microfinance company becomes
illiquid due to the high default rate apart from the fact that the concept will make enough funds available for
them to loan out to their clients. In addition to the above objectives, the study was also to determine if the use of
asset securitization can improve profitability for microfinance companies. According to the study, asset
securitization will improves profitability of microfinance companies in Ghana. A majority 83.5% of respondents
expects their profit levels to rise with the use of asset securitization in microfinance in Ghana. This is because, as
a result of the availability of excess funds to loan out to needed clients due to funds provided by the SPV because
of asset securitization. As more clients are served due to availability of funds, profits margins will increase with
all other factors held constant. Finally, the study sought to identify the challenges that microfinance companies
may face in the use of asset securitization in Ghana. Having understood the securitization concept, majority 71%
of the respondents believes they will face two or more challenges if they were to securitize their loan portfolio.
They listed some of these challenges as the lack of the right and adequate infrastructure on asset securitization,
lack of the right regulation on asset securitization, lack of sophisticated or adequate supervision and rating
agencies, lack of control over co-mingling of cash flows from loan repayment and other sources etc.
Judging from the above, it is now the duty of policy makers to work out how to institutionalize asset
securitization knowing the economic importance of MFIs especially funding SMEs. This is because SMEs
constitute majority of businesses in Ghana as well as employs majority of people in the private sector which has
contributed enormously to the Ghanaian economy (Quartey and Abor, 2010). It is also known that most of the
SMEs find it difficult in assessing loans from commercial banks and as a result MFIs have been a major player in
financing SMEs. Again majority of MFIs in Ghana have liquidity challenge and therefore cannot meet demand
from customers. From the study asset securitization could be an alternative source of raising cheaper funds for
microfinance business since MFIs borrow at a high rate from commercial banks before they lending to their
clients thereby making their rates very high leading to high default rate. There should be a broad consultation
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among stakeholders to see how the concept can be adopted and follow up with the necessary regulation and
infrastructure. Although this is not going to be an overnight thing, the regulator of financial services in Ghana,
the Bank of Ghana can position itself by providing the necessary education to stakeholders involved, regulation,
infrastructure and human resource to make asset securitization a reality in Ghana within the shortest. Asset
securitization requires a whole new policy and without the acceptance of the concept by policy makers who will
provide the legal framework, its implementation will be a mirage.
Acknowledgment
We thank Dr. Patrick Seshie for his counsel and guidance throughout this work. We also acknowledge the
generosity of all the respondents to the questionnaires as well as Messrs. Wolali Ametepe and Kwame Ntim
Sekyere for their contributive ideas and support. Finally, we acknowledge the management and staff of the five
microfinance institutions that were used for the study.
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Appendix
Table A.1
Level of Education
Number of Respondents
Percentage
118
74
59.0
37.0
8
4.0
200
100.0
HND/Diploma
First Degree
Master’s Degree
Total
Table A.2
Years of experience
Number of Respondents
Percentage
Less than 2 years
26
13.0
Between 2 to 3 years
41
20.5
Between 3 to 4 years
Above 5 years
60
73
30.0
36.5
Total
200
100.0
Table A.3
Knowledge or idea in
asset securitization
Number of Respondents
Percentage
Yes
56
28.0
No
136
68.
Neutral
Total
8
4.0
200
100.0
Table A.4
Existence
of
asset
securitization in Ghana
Number of Respondents
Percentage
No
124
62.0
Neutral
76
38.0
Total
200
100.0
Yes
Journal of Economic and Financial Studies.
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Asset securitization on sustainability …
Guaranteed cash inflow
Daniel et al., JEFS (2015), 03(04), 73–89
Table A.5
Number of Respondents
Percentage
Yes
190
95.0
No
10
5.0
Total
200
100.0
Table A.6
Willingness to engage in
SPVs
Number of Respondents
Percentage
Yes
158
79.0
No
36
18.0
Neutral
Total
6
3.0
200
100.0
Table A.7
Loan portfolio package into
marketable securities
Number of Respondents
Percentage
Yes
160
80.0
No
30
15.0
Neutral
10
5.0
Total
200
100.0
Table A.8
Impact of securitization
sustainability of MFIs
on
Number of Respondents
Percentage
Yes
174
87.0
No
20
10.0
Neutral
6
3.0
200
100.0
Number of Respondents
Percentage
Total
Table A.9
Impact of securitization on the
profitability of MFIs
Yes
167
83.5
No
Neutral
26
7
13.0
3.5
Total
200
100.0
Table A.10
Challenges
of
securitization
asset
Number of Respondents
Percentage
No challenge
7
3.5
One challenge
51
25.5
Two or more challenges
142
71.0
Total
200
100.0
Journal of Economic and Financial Studies.
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