THE OUTLOOK OF THE RURAL BANKING SECTOR IN GHANA
1.0 INTRODUCTION
The rural banking sector plays an important role in private sector development and poverty reduction in the rural areas. It is the sector that serves as the primary vehicle for extending reliable financial services and products to the rural areas with the ultimate aim of improving the financial access of the rural population in order to equip them to take advantage of economic opportunities to improve on their livelihoods and further lead to rural economic development.
Efforts to improve rural and agricultural financing over the years has taken the centre stage in addressing rural poverty especially in most developing economies like ours. However, lack of financial access to rural areas still remains one of the threats to economic development in Ghana and other developing countries. Government and its developmental partners have instituted several projects and programmes aimed at improving access to credit, inputs or broad range of financial services to the rural areas to enable them to acquire productive assets.
In spite of these projects and programmes, the rural - urban financial gap in Ghana kept growing and this was before the establishment of rural banking. The various approaches to rural financing in Ghana which included the establishment of state banks and the use of direct subsidised credit were faced with sustainability challenges leading to the collapse or near collapse of such programmes. It is, however, important to note that financial services during the era of inadequate supply of financial services by organised institutions to the rural areas were undertaken by informal groups like the Susu collectors who did not have the necessary capacity needed to support the attainment of rapid rural economic development.
The significance of rural banking cannot be overemphasised considering the fact that its inception has remained as an important step towards bridging the wide rural –urban financial gap which has stifled rural economic development in Ghana. The formalization rural financial services in Ghana have taken three major forms namely:
- The introduction of the Rural Banking from 1976
- The formation of the Association of Rural Banks in 1981
- The establishment of the Association of Rural Banks Apex Bank in 2002.
The objectives of all these activities were to improve access to financial services in the rural areas in an efficient, reliable and sustainable manner which has not been achieved in other earlier approaches.
1.01 History of the Rural Banking Sector.
The first rural bank was established in 1976 in Nyakrom, a farming community in the Central Region of Ghana. A second bank was opened in the following year at Biriwa, a fishing community also in the Central Region. By 1980 the number of rural banks had reached 20. Managers and directors of the established rural banks founded the Association of Rural Banks (ARB) in 1981 to promote the exchange of information and to improve the performance of rural banks as a whole. Over the period 1980–84 the number of rural banks rose rapidly and reached 106.
The ARB Apex Bank Limited (Apex Bank ) was incorporated in 2000 and licensed in 2001 by the Central Bank. The Apex Bank then commenced business on 2nd July 2002 to provide the rural banks with technical, managerial and financial support services which was formally provided by the Bank of Ghana but was later on withdrawn in 1994.
There are 131 rural and community banks in all the ten regions of Ghana with over 600 agencies located across the country. As at the end of 2008 rural banks accounted for about 5% of the total assets of banks and non bank financial institutions in Ghana and they also account for about half of all banking outlets across Ghana (IFAD 2008).
2.0 STABILITY AND SOUNDNESS OF RURAL AND COMMUNITY BANKS
Sustainability is a key requirement for financial institutions providing financial services in the rural areas due to the peculiar nature of the rural financial market. It is the only assurance that the institutions established will be there to continue providing the services for which it has been established.
The Apex Bank in view of ensuring the soundness and stability of the rural and community banks has established an Efficiency and Monitoring Unit (EMU). This Unit is mandated to undertake on-site and off-site monitoring of the activities of RCBs. The EMU has, therefore, as part of its activities instituted the publication of a report that provides information on the key financial indicators on all the rural banks. The stability and soundness of the rural banks have been supported by the introduction of the EMU rating which ranks rural and community banks based on their performance. This report has become a benchmark document used by rural banks to measure their performance in the industry. The following key indicators illustrate the stability and soundness of the rural banks in Ghana:
2.1 Capital Adequacy Ratio (CAR) i.e. Adjusted capital /Adjusted Assets x 100
The CAR as at December 2009 indicated that 107 RCBs representing 82% of 131 RCBs had met the minimum CAR requirement of 10%.
2.2 Paid Up Capital
Out of 131 RCBs that reported, 84 banks representing 64% had met the new capital requirement of GH¢150,000.00 as at December 2009.
2.3 Assets Quality
Total gross loans and advances represented 42% of the total assets of all the RCBs as at the end of December 2009. The total investments also formed 29.9% of the total assets.
2.4 Reserve requirement
In terms of meeting the reserve requirement Ninety (90) banks had met the secondary ratio of 30.0% or above recording an excess secondary reserve of 2.1% above the December 2008 recordings.
The total provision for bad and doubtful debts formed 6.6% of the total gross loans and advances indicating the quality of the loan portfolio held by all the RCBs.
2.5 Profitability
Cumulative Profit Before Tax (PBT) has been on the increase. as at the end of December 2009 114 RCBs out of 131 RCBs representing 87% of the RCBs operated profitably
Classification Based on CAEL(Capital , Asset, Earning Liabilities) rating as at December 2009.
CATEGORY | NO OF BANKS |
Strong | 6 |
Satisfactory | 83 |
Fair | 35 |
Marginal | 6 |
Unsatisfactory | 1 |
Total | 131 |
Source (Apex EMU report,2009)
The ratings as provided, is an indication that the majority of the rural banks in Ghana are technically solvent to support financial inclusion for the rural poor.
3.0 SOURCES OF FUNDING
Funding for on-lending is a very vital requirement to enable rural financial institutions like the rural and community banks to meet the demands of their clients and also to finance their operations. The nature of the sources of funding for financial institutions like the rural banks can affect its outreach, management and the sustainability of its operations. It is, therefore, important to take note of the various sources of funds available for the rural banks since it has an implication on the future of its activities.
The sources of funding to support the operations of the rural and community banks can be divided into four main categories:
- Internally generated funds
- Institutional funds
- Equity funds
- Donor and Government funds.
Details of these sources of funding are as follows:
3.1 Internally generated funds
This is mainly made up of deposit mobilizations made by the RCBs. In order to improve on the funds from deposits, most RCBs are undertaking Susu banking in order to meet the increasing loan demands of their clients. This source of funding encourages the creation of assets for the rural bank clients and further commits the rural banks to provide credits and other facilities to the depositors in order to retain them. Although its less expensive to manage, its requires some financial and managerial commitment in order to raise substantial amounts for the purposes of onlending.
3.2 Institutional funds
These are mainly commercial funds from corporate institutions and are contracted by the rural banks for on-lending or for capital investment purposes. E.g. Apex Loans, SPEED Funding Facility (SFF), Ghana Women Fund, etc. These funds are mostly expensive but their availability can support rural banks to increase outreach and improve profitability. Rural banks that want to take advantage of this source of funding are always required to show good governance and accountability as well as sound financial position.
3.3 Equity funds
These are long terms funds raised contributed by shareholders to support the operations of the RCBs. Although These funds are the cheapest of all the sources, it has over the past years not been sufficient enough to fully support the rural banks to meet the loan demands and their other operational needs. Shareholders contribute to the better management of the rural banks and further helps the rural clients to be stakeholders in the whole rural banking sector.
3.4 Government and Donor funds
These funds are mainly meant for specific projects. The funds in most cases are intended to improve access to credit by targeting beneficiaries within the catchment areas of the RCBs. They mostly come with concessional interest rates and RCBs in some cases are allowed to add some margins to cover the cost of operating this fund. Example of such project funds are; CBRDP, MOWAC, Social Investment Fund, RTIMP, etc. These funds come with political or donor influence which can affect the operations of the banks.
A summary of the sources of RCBs funding and their implication on their operations is provided in the table below:
Source | Advantages | Challenges |
Internally generated Fund |
|
|
Institutional Funds (Borrowing) |
|
|
Equity Funds |
|
|
Donors and Government Funds |
|
|
4.0 ASSESSING THE ACHIEVEMENT OF THE RURAL BANKING SECTOR IN GHANA
The rural banking sector has contributed immensely to the development of the rural economy of Ghana in the following main ways:
4.1 Deposit Mobilization:
The rural banking sector has contributed to the mobilization of excess funds, making it available to other sectors of the economy. Through the RCBs’ deposit mobilization drive; most rural folks have been introduced to formal savings which has contributed to building their financial assets thus enabling the creation of wealth. By developing simple and appropriate savings products which enable mobilization officers of the rural banks to visit farms, shops, market places, etc, more rural folks are now experiencing banking at their convenience which was a preserve for the privileged few.
4.2 Access to credit and non -credit products
Rural banks have contributed to the improvement of banking culture amongst rural clients. These banks have succeeded in demystifying the act of banking and have contributed to increasing the level of money in circulation through the formal banking systems. Rural banks are supporting the growth and development of rural enterprise by providing rural entrepreneurs with the needed financial and non financial products. For example some rural banks have instituted ware housing receipt facility that enables these banks to buy certain produce directly from the farmers they finance thus creating reliable and ready markets for the produce of the farmers.
4.3 Investment Opportunity for the rural population
The concept of rural banking revolves around community ownership which requires that the head office of every rural bank should be located in the rural community. These banks now provide opportunity for the rural people to pool their resources to set up and own banks. By this rural people in Ghana now have the opportunity to create wealth by investing in banks which were hitherto the preserve for people living in the towns and cities. Through the rural banks, rural clients can invest in government papers, Treasury Bills, Fixed Deposits and other products which provide them with higher returns rather than keeping their monies in their homes or with the traditional Susu agents who mostly do not pay any interest on the amount saved.
4.4 Financial Linkages and Strategic Alliance
The Current developments in the rural banking sector indicate that the total number of rural banks (131) and their agencies or branches (600) put together forms the largest banking network in Ghana. These banks are now present in all the district capitals of Ghana. The efficient network of these banks have been made possible by the activities of the Apex Bank which has provided an operational platform that has enabled the development of institutional linkages with governments, donors and other projects that intend to expand services to the rural communities. The presence of these banks in the remote places of Ghana provides an opportunity for strategic linkages with other providers to make available financial or non-financial services to rural Ghana. The rural banking network now serve as a convenient platform for money transfer services from overseas or local to any place in Ghana. It is worth noting that before the establishment of an efficient rural banking system most rural folks had to travel several hours to receive monies remitted from their relatives or even to receive their salaries.
4.5 Women Empowerment through Microfinance
The rural banks by their location serve clients who may not necessary have assets to serve as collaterals in order to secure a loan. Majority of such category of clients are women especially in the context of the Ghanaian tradition where properties or assets are owned mainly by men. Through the microfinance technologies employed by the rural banks, more women have been assisted financially to enable them to take advantage of economic opportunities to improve on their lives and that of their households. Such beneficiaries are also provided with financial training, business management and general life skills training programmes aimed at ensuring that the women clients are empowered to improve on their day to day activities.
4.6 Community Development
Rural banks all over the country have identified the importance of giving back to the communities supported their operations. Most rural banks, therefore, have contributed positively to the development of their communities by supporting social development projects which include the building and refurbishment of schools, hospitals, community centers, support to brilliant but needy students, etc. by providing financial assistance and other relevant support to ensure that the communities in which they operate benefits directly from their operations.
5.0 RURAL BANKING AND THE CHALLENGES THEY FACE
Supplying financial services in the rural areas all over Africa continues to be challenging. This is due to the high cost and risk associated with doing business in harsh economic and developmentally challenged environments which are common in the catchments areas where these rural banks operate. Some of the major challenges faced by the rural banks in their day to day operations are as follows:
- High transaction and operating cost which translate into high cost of loans to clients
- Competition as a result of downscaling by major banks into the catchment areas of the rural banks. During the last few years commercial banks have expanded their operations into the major towns capturing the most profitable clients from the RCBs as the commercial banks can offer wider range of services
- High staff turnover leading to high loss of human resource and high cost of training
- Weak capital base which is preventing the RCBs from providing medium and long term lending. Most RCBs are also unable to meet potential demands made by the clients
- Inadequate logistics. The unavailability of the needed logistics like motor bikes, vans, computers, etc are hindering the outreach drive of the banks
- Inability to attract high calibre of staff (Human resource).This is mainly due to inadequate incentive packages available within the rural banking sector
- Lack of vibrant economic activities in certain catchment areas of the rural banks This prevents efficient economic usage of the loans granted by the rural banks and therefore repayment is mostly affected under this circumstance
- Lack of ready markets for the produce of the clients of RCBs contracting loans for their farming activities contributing to poor loan repayment
- Lack of appropriate or broad range of products to support the varied needs of the farmers is hindering the impact of financial access to the rural client
- Poor infrastructure development of the rural areas
6.0 CHANGING THE FACE OF RURAL BANKING TO MEET FUTURE NEEDS
The rural banking concept has been going through transformation over the years and the transformation process will continue to ensure that the concept gains the needed characteristics to meet the changing trends in rural financing. In order to make rural banking relevant in the changing financing landscape, rural banks need to prepare adequately to face the growing competition posed by other banks by ensuring to undertake the following key activities:
6.1 Investing in Information and Communication Technology
All the RCBs, their branches and offices are being computerized and provided with standard banking software to improve their operational activities. In all the offices of these banks are being provided with a Wide Area Network (WAN) using VSAT infrastructure to link the whole rural banking system to enable them to operate on a common platform. Through this infrastructure, RCBs can now clear cheques online since all operational centers of the RCBs have been connected to the head office of the Apex Bank.
6.2 RCBs Mergers
Some RCBs are still struggling to meet the new minimum capital requirement. These weak and small RCBs with limited scale will “disappear” in their inability to raise the needed capital as required and also may not be able to scale up their operations to favourably compete with the traditional banks within their catchment area. In addition the cost of financial technology acquisition can lead to high liquidity constraints on some rural banks which may negatively affect their operations. In order to prevent the negative repercussions as a result of a collapse of the weak and small RCBs on the entire rural banking sector, there is a growing interest in exploring options for mergers within the rural banking sector. The positive returns in merging the rural banks will lead to the birth of stronger rural banks which will have efficient operational systems to compete favourably with the traditional banks.
6.3 Improvement in the Microfinance Operations /Activities of RCBs
Rural banking involves the provision of financial services to the rural economy to improve rural development to the productive poor and the low income earners in the informal sector of the economy who are mostly found in the catchment areas of the rural banks .The rural banks’ sustainability is linked to the industry’s ability to implement and adopt appropriate microfinance technologies to reduce the size of their non-performing loans with the view to increase profitability to ensure sustainability.
Effective microfinance methodologies will enable diversification of the rural banks’ loan portfolio since small loans will be provided to several individuals under this methodology rather than granting a huge amount to one person as done by most traditional banks. The implementation of this financing methodology will enable the banks to favourably compete with the traditional banks venturing into the territories of the rural banks. In addition, appropriate microfinance methodologies will attract the attention of developmental agencies to assist the rural banking industry to improve on their outreach since microfinance has become a well known tool needed in the fight against poverty. It is also important to point out that rural banks are the largest regulated microfinance institution network in Ghana and therefore the sector ensures the safety of all investment in microfinance channelled through the rural banking sector.
6.4 Enforcement of Quality Human Resource and Incentive Policies
For rural banks to deepen microfinance to enhance rural development there is the need for these banks to reposition themselves to offer efficient and effective services to clients to prevent client loss and improve impact. This can only be achieved if RCBs develop and improve the quality of its human resource to provide competitive services and products so as to boost the image of rural banking amongst the rural population and other stakeholders. In this light, it is important for RCBs to continuously provide on-the job training programmes for their management and staff to enable them to come up to date with current methodologies that will enable them to design and implement products and services for the rural clients. Institutional visits to performing microfinance RCBs can be instituted and coordinated by the Apex Bank to promote institutional exchange of knowledge and experience aimed at improving the efficiency of the human resources within the rural banking sector.
6.5 Establishment of a Rural Bank Credit Bureau
The characteristic of clients of the rural banks have changed over time. More and more rural clients are now practising multiple or double banking. These clients borrow from one bank to repay facilities owed at another bank. In cases where some clients migrate from one community to another community leading to changes in banking relationships, locating such clients to honour their outstanding loan becomes difficult if not impossible. Current activities within the rural banking sector do not provide any data on these clients to help rural banks to effectively assess the creditworthiness of such clients before granting them facilities. In the absence of this information on clients, RCBs are not better placed to judge the creditworthiness of these clients and other potential clients. In order to devise workable strategies to safeguard the loan portfolio of the rural banks, there will be the need for the Apex Bank to support the development of a Rural Bank Credit Bureau (RBCB) that will build information about client’s credit worthiness. The RBCB report can then be made available to RCBs needing it to make a credit decision about their microfinance customers. The establishment of a credit bureau for the rural banking sector will go a long way to protect the loan portfolio of the rural banks since the requisite information needed to make quality loan decisions can easily be obtained and this can further enhance the sustainability of the industry to enable them continue to provide important services needed to promote rural development and poverty reduction.
6.6 Design and Implement ICT Driven Products (Innovation)
One of the main challenges facing rural banking and microfinance is the high cost associated with providing financial services to the rural economy. High operating cost is also one major constraint to outreach. Outreach involves the ability to improve physical access or presence to the clients within the catchment areas and also extend their opening hours to serve more clients within a day or over the entire week with weekends inclusive.
It is important to note that current rural clients have a strong need for efficient and reliable financial services that is tailored to fit into their daily activities. This is supported by the way rural clients patronize the activities of the informal financial service providers like Susu collectors within their localities. The Susu collectors do not have any operating time and, therefore, clients could have access to them at any time of the day.
RCBs in repositioning themselves for the future cannot overlook the growing needs of the clients they serve. In order for RCBs to improve on their sustainability, impact and outreach it is recommended that RCBs employ the use of technology to help the sector to improve efficiency, track operations more accurately, increase transparency and reach new customers. In this vein, delivery technologies, such as automated teller machines (ATMs) customized to the rural economy, point-of-sale (POS) networks (devices in retail outlets which use debit/credit cards to facilitate electronic payments and transactions) and mobile phone banking can be relied upon to support the operations of the rural banks to improve outreach and also reduce the long term operational cost associated with improving outreach. These technologies can allow customers to make payments, transfers, cash withdrawals and cash deposits outside branch offices and office hours, thereby, enabling clients to have access to banking facilities as and when they want them just like the traditional Susu they are used to.
6.7 Provision of Innovative Products
Rural people are exposed to risks that threaten their lives, health and property. Evidence available indicates that most rural dwellers do not live in well built houses. The availability of micro insurance and micro housing products can improve on the livelihood of the clients and further provide additional income lines for rural banks. A micro housing ownership product will reduce the incidence of migration and, therefore, guarantee that rural banks will continue to have a very active clientele base to offer loans and other banking services to sustain their operations.
The risk that rural clients may face can negatively affect the health of the portfolio of these banks and further affect their profitability. This is so because in the event of the occurrence of any risk, loan clients with rural banks may default on repayments, thereby, reducing the overall profitability of the bank and this over a long period can threaten the sustainability of these banks.
In order to create and improve on the wealth of the rural clients, there is the need for all stakeholders to become aware of the various risks and housing needs of the rural clients and further develop innovative products or linkages with insurance and housing providers to provide broad range of products to meet these needs.
7.0 CONCLUSION
Rural banking remains to be a positive innovation in the banking sector. It has proven to be a major player in partnering other formal financial intermediaries in Ghana to support economic development. Although the sector has performed creditably over the past years, it is important for stakeholders to look into the future and devise strategies to ensure that rural banking become relevant in Ghana’s economic programmes by ensuring that the sector becomes more vibrant and efficient in the distribution and management of financial resources. With the decline in donor assistance and the challenges that come with government funds, the sources of funding for rural banks are beginning to be limited. This therefore calls for effective technological based deposit mobilization strategies and the setting up of private commercial funds to provide additional funds to help the rural banking sector to increase outreach and further improve on its impact in rural Ghana. The achievement of the aforementioned activities cannot be possible without leading to an increase in the operational cost of these banks since it will demand hiring quality staff and investing in infrastructure and the recommended approach to ensure that the sustainability of the banks is the mergers and acquisition of rural banks.
