ABSTRACT
The Ghanaian microfinance sector is made up of Financial NGOs, Credit Unions, Susu Collectors, Savings and Loans Companies and Rural Banks. Rural banks have 60% of the informal financial market and also account for about 5% of the total assets of all the financial institutions in Ghana. They in addition contribute about half of all banking outlets across Ghana.
The paper reviews the achievements and lessons learnt within the rural banking sector and conclude that, these achievements have been influenced largely by the establishment of the ARB Apex Bank. It further reveals some important lessons that the rural banking sector brings to bear on the development of the entire microfinance sector in Ghana, Africa and the world at large.
Lessons in the rural banking sector suggest that the regulation of the sector, capacity building, government and donor support, strategic linkages and performance rating have all aided in improving outreach, sustainability and impact of the sector.
To grow the entire microfinance industry in Sub - Saharan Africa, it is expected that stakeholders would build effective and efficient apex bodies within the required legal framework to enhance its operations and further adopt the key lessons that have aided the growth of the rural banking sector in Ghana.
1.0 INTRODUCTION
Microfinance institutions (MFI) now play a key role in the fight against poverty by helping poor households build their income and assets to enable them to improve on their livelihood According to the State of MicroCredit Summit Campaign Report (2005), as of 2004, some 3,200 microcredit institutions had reached more than 92 million clients of which approximately 73% were living in poverty when their first loan was made.
Several MFIs in their bid to increase outreach and improve impact are finding more efficient and innovative means of getting their products and services to their clients. According to Helmore et al, most Africans (well over 50%) live on less than $2 a day. Moreover, all of the 21 countries listed in the United Nations’ low human development ranking are located in sub-Saharan Africa. These statistics calls for a more pragmatic approach to consolidate the lessons learnt through the usage of microfinance as a tool for eradicating poverty in Sub-Saharan Africa.
Without access to basic financial services like savings, credit, insurance, most Ghanaian will remain at the margins of economic opportunity with little hope of realizing their tremendous creative potential. Microfinance is not a new phenomenon in Ghana. Some of the informal practices such as money lending, ‘Susu’, Rotating Savings and Credit Associations (ROSCAS) can be traced to ancient communities in the country.
The challenge to evolve innovative strategies that would strengthen such traditional approaches has led to the development and operation of formal institutions like the Rural Banks, Credit Unions, Savings and Loans Companies, some commercial and development banks like the Agricultural Development Bank, Women’s World Banking, Ghana Commercial Bank and Non-Governmental Organisation (NGOs).
The Government of Ghana has also embarked on a sustainable development of the microfinance sub-sector with its Development Partners as a strategy, among others, for reducing poverty.
A review of the microfinance industry indicates that stakeholder in the microfinance industry are contributing to achieving a common goal of reducing poverty. However it is recommended that for a broader and more aggressive means of ensuring an improved impact of the use of microfinance, there is the need for players in the sector to compare and exchange notes on the workable tools as well as the non-effective innovations. This therefore highlights the need for a common platform that will stimulate the sharing of knowledge and experience amongst individuals, government, donors, institutions and other stakeholders involved in using microfinance as a tool for poverty reduction.
1.1 Objectives
The objectives of this presentation are:
- To identify the key lessons within the rural banking industry in Ghana
- To share the lessons and draw policy recommendations
2.0 TYPOLOGY OF MICROFINANCE INSTITUTIONS IN GHANA
The microfinance sector in sub-Saharan can be put to 5 main categories and each category has its own strengths and weaknesses. These categories are as follows:
- Rural and Community Banks (RCBs):These banks are registered to operate mainly in the rural and semi –urban areas and are fully regulated
- Credit Unions: CUs are not regulated but have an apex body controlling or partially regulating the activities of all credit Unions in Ghana
- Financial NGOs: FNGOs can be international network affiliates or stand-alone local NGOs. Largely credit-only Institutions.
- Non-banking financial institutions (NBFIs) are “for profit” enterprises that are not registered as commercial banks and are typically characterized by lower capital requirements than those of commercial banks.
It is important to indicate that knowledge and experience sharing is a sure bet to get the MFI industry within the sub Saharan African working to achieve the needed impact, outreach and sustainability.
2.1 Operators in the Microfinance Sector in Ghana
There are normally 3 groups of operators in any microfinance sector. These are:
i. The Target Beneficiaries or Clientele;
ii. Suppliers of Financial Services; and
iii. The facilitators.
2.2 The Target Beneficiaries
This is made up largely of the following:
Ø The productive poor
Ø Women in the informal sector
Ø Unemployed youth
Ø Subsistence and small scale producers in the agricultural sector.
Ø Vulnerable groups in certain areas of the country due to inaccessibility.
Ø Disabled persons.
2.3 Suppliers of Financial Services
Ø These include both banking and non-banking institutions which operate as formal, semi-formal and informal providers/suppliers of financial services.
Ø Providers of formal financial services like the savings and loans companies, rural banks and some commercial banks.
Ø Providers of semi-formal financial services are NGOs such as Action Aid Ghana, Grameen Ghana, Cedi Finance, Sinapi Aba Trust and the Credit Unions.
Ø The informal operators are the “susu” collectors, money lenders and rotating savings and credit associations.
2.4 The Facilitators
Ø The agencies in this category play a facilitating role in the microfinance sector through technical support services, regulations and financing. They include:
Ø Government agencies which are involved in policy making and regulation e.g. Ministry of Finance, Ministry of Agriculture, Ministry of Local Government and Rural Department and Bank of Ghana.
Ø Capacity Building- These include NGO’s such as Freedom from Hunger, Association of Rural Banks, TechnoServe CARE International and the University of Cape Coast(UCC).
Ø Donor agencies such as World Bank IFAD, CIDA, USAID, UNDP, DANIDA and AfDB.
3. 0 THE IMPORTANCE OF KNOWLEDGE SHARING
The benefits of sharing experience far outweigh the gains expected since an effective knowledge platform will help MFIs in the following ways:
- Foster innovation by encouraging the free flow of ideas
- Help in understanding markets and customers
- Development of product and services
- Development of vision and strategies
- Building competencies, skills and knowledge
- Improve customer service by streamlining response time
- Boost revenues by getting products and services to market faster
- Enhance employee retention rates by recognizing the value of employee’s knowledge and rewarding them for it
- Streamline operations and reduce costs by eliminating redundant or unnecessary processes
3.1 Knowledge sharing framework
Source(Sethumadhavan,2007)
4.0 ACHIEVEMENTS AND LESSONS WITHIN THE RURAL BANKING INDUSTRY
4.1 The Significance of Rural Banking in Ghana
The significance of rural banking cannot be overemphasised considering the fact that its inception has remained an important step towards bridging the wide rural –urban financial gap which has stifled rural economic development in Ghana. The formalization of rural financial services in Ghana has taken three major forms namely:
- The introduction of 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 objective of all these activities was 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.
4.2 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 also 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 withdrawn in 1994.
There are at the moment 131 rural and community banks in 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).
4.3 Nature of Rural Banks in Ghana
The main characteristics of all rural banks in Ghana are as follows:
• RCBs are limited liabilities
• Shareholding structure is that individual shareholders can acquire shares up to 30% of the total shares and corporate bodies are mandated to hold up to 50% of the total shares
• No financial institution is allowed to hold shares in any rural bank
• Capital requirement(Stated Capital) needed is GH¢150,000.00 (USD
• RCBs are required to keep Statutory liquidity as follows:
Ø 8% primary reserve with Apex Bank (Clearing account) and cash in till
Ø 5% of deposits with the Apex Bank
Ø 30% secondary reserve for Treasury Bills ( through the Apex Bank)
• Capital Adequacy Ratio 10% ≥10( Adjusted capital / Adjusted Assets x100)
4.4 Microfinance Activities of the Rural Banks
Microfinance activities in the Rural Banks may be categorised as follows
i. Own microfinance programmes.
ii. In partnership with NGOs/Donor Institutions/Government Agencies programmes.
iii. Linkage banking programmes.
4.5 Rural Banks’ Own Microfinance Programmes
The approach under this programme can be classified as follows:
i. Banking-on-wheels programme;
ii. Women-in-development programme;
iii. ‘Susu’ Micro Savings and Credit programme.
4.6 Banking-on-Wheels Programme
Some of the banks have developed this product to deepen outreach. Peripatetic teams on a vehicle move from village to village within the catchment area to deliver banking services - savings and credit delivery. They go to these communities mainly on market days or traditional holidays – i.e. on taboo days when they do not go to the farms or go on fishing.
4.7 Women-in-Development Programme
The scheme, which is in operation in some of the rural banks, offers 3 services to women in the rural areas:-
a. Community-based financial services providing saving and credit opportunities.
b. Non-formal education that offers guidelines in family survival skills.
c. A forum for peer group support.
4.8 ‘Susu’ Programme
This is one of the delivery channels which have proved very popular with the clients. The banks either engage their own staff or agents to go to the markets, shops, churches and homes of clients to collect their savings. The size of the savings is from GH¢1 (about USD 0.71) to any amount the client is willing to save.
4.9 Rural Banks in Partnership With NGOs/Donor Institutions And Government Agencies
The following partnership programmes are currently being undertaken by the rural banks:
· Community Based Rural Development Project
· Rural Enterprise Development Project
· Root and Tuber Improvement and Marketing Programmes
· Social Investment Fund
· Urban Poverty Reduction Project
5.0 KEY ACHIEVEMENTS OF THE RURAL BANKING SECTOR IN GHANA
5.1 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.
5.2 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 amount of money in circulation through the formal banking systems. Rural banks are supporting the growth and development of rural enterprises 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.
5.3 Investment Opportunity for the Rural Population
The concept of rural banking hinges on 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.
5.4 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 virtually 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 and non-financial services to rural Ghana. The rural banking network now serves as a convenient platform for money transfer services from overseas or local sources 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 by their relatives or even to receive their salaries.
5.5 Women Empowerment through Microfinance
The rural banks by their location serve clients who may not necessarily have assets to serve as collateral in order to secure loans. 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.
5.6 Community Development
Rural banks in Ghana have identified the importance of giving back to the communities that had supported their operations since their inception. 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 centres, support to brilliant but needy students, etc. by providing financial assistance and other relevant support to ensure that the communities in which they operate benefit directly from their operations.
6.0 KEY LESSONS FROM THE RURAL BANKING SECTOR IN GHANA AND ITS IMPLICATION ON THE MICROFINANCE SECTOR
6.1 Formation of an Apex Body
The establishment of the Apex Bank for the rural banks has contributed immensely to the overall growth of the rural banking sector in many diverse ways. The Apex body has given the rural banking sector the much needed strength to deliberate and negotiate on issues and policies that are relevant for the advancement of the rural banking sector. The Apex body has aided in improving the business image of the rural banking sector in Ghana and has succeeded in achieving high usage of rural banks cheques for the payment of services and goods within the economy.
The policy implication is that it is important for the sector to consider building effective apex bodies or institutions that will function to ensure that the felt needs of its members are addressed to allow the MFIs to concentrate on their core activities. It should further help provide a united front to negotiate and also lobby other agencies and governments to support the growth of the sector.
6.2 Capacity Building
The capacity dimension of the rural banks in terms of human, structural and technological resources are important constraint to improving financial access to the rural poor. The Apex Bank in its bid to improve these structures has instituted capacity training activities aimed at improving the quality of the human resource base within the rural banking sector. The Bank’s Professional Development and Training Department organises training and refresher courses for the staff, management and board members of the various rural banks.
The Apex Bank in addition, with the support of the World Bank and other donors is currently computerising the rural banking system to create a single platform to speed up transactions within the rural banking sector that include but not limited to money transfer services, cash withdrawals, etc.
This lesson implies that the microfinance sector in the region will not be effective if efforts are not put in place to improve on human, structural and technological resources. It is therefore important for the industry to place emphasis on developing the capacity of its staff and also develop the necessary structures to support the growth of the industry. The UCC is doing extremely well in supporting the industry with capacity building programmes.
6.3 Regulation of the industry
The prudential regulation of any financial institutions rests on the need to protect depositors from the loss of their savings and to preserve confidence and strengthen the financial system. Regulation of the financial sector has often proved ineffective in developing countries due to information and data collection problems, weak accounting standards, lack of professionalism and political interference.
In order to improve on the regulation of the rural banking sector, the Apex Bank has legally been mandated to undertake onsite and offsite supervision of the rural banks to ensure adherence to prudential requirements. In view of this, rural banks are required to send prudential returns on monthly basis to the Bank of Ghana with a copy to the Apex Bank. Regulation of the rural banks has impacted greatly on the performance of the rural banking systems and this is supported by the growth in the key financial indicators recorded over the years.
These lessons, therefore, imply that the regulation of microfinance activity is crucial to the sound development of the sector to ensure that the objective of reducing poverty across the sub region is achieved. Regulation from the Apex Bank’s point of view indicates that the sustainability of the unit rural banks has been improved since regulation requires full disclosure which enables the Bank to identify flash points within each rural bank for the necessary attention or otherwise. An effective regulation of the microfinance sector can improve the ability of the MFIs within the context of the countries to receiving investment funds to support or improve their activities. This is because a clear regulation act seeks to improve the confidence of microfinance investment vehicles (MIV) in regulated markets. Regulation may also improve MFIs governance and ownership structure.
The regulation of the microfinance sector should be encouraged and the various experiences and successes of the countries that have successfully achieved full regulation of its microfinance sector should be shared to aid other countries that are now implementing microfinance regulation laws.
It is important however to indicate that the focus of regulation should be that the regulation should be sufficient to protect depositors interest but not so prescriptive to hamper poverty alleviation.
6.4 Performance rating of rural banks
The Apex Bank has initiated a performance report based on the returns submitted by the rural banks to the Bank of Ghana and the Apex Bank. This report is analysed by the Efficiency Monitoring Unit (EMU) of the Apex Bank and further developed into a composite performance report on quarterly basis. The EMU report serves as a bench mark that allows each rural bank to compare its performance with other rural banks in the same or different regions and also on a national basis. The report further allows rural banks to compare their deposits, loan portfolio size, capital requirements, reserves, etc to enable them to improve on their weak points or further strengthen their positions. This report is now being used by boards of some rural banks in setting targets for the senior management, serving as a performance management tool. The usage of this information to a large extent has helped in improving the performance of rural banks in their bid to reposition the rural banking sector to complement other developmental partners in the fight against poverty.
The lesson drawn from the experience of the rural banking sector implies that to improve performance, sustainability, outreach and impact of MFIs , there is the need for the establishment of performance review format that will introduce competitive rating for all MFIs in order to do enable them to enhance the agenda of poverty reduction in the sub region .
6.5 Annual Manager’s Conference
Information and knowledge sharing has been identified as a key ingredient in improving the frontiers of financial services and products to the informal sector. In view of that the ARB Apex Bank in 2002 instituted the Annual Rural Bank / Apex Bank Managers’ Conference that brings together managers or senior officers within the rural banking industry to exchange ideas, share experiences, review operational issues, etc. This conference is aimed at equipping participants to improve on the performance of their banks.
The microfinance sectors is evolving and therefore players need to meet to review and follow up on the evolving nature of the industry to ensure an improved and sustained effort to reducing poverty across the sub region.
6.6 Institutional /Government and Donor support
Deepening financial access to the informal sector through microfinance cannot be fully achieved without the support of Governments, developmental agencies and donors. The creation of an enabling environment which include infrastructure development are directly the roles that governments need to undertake in order to enable financial actors to efficiently improve outreach to rural or informal clients.
The Apex Bank in performing its role has received tremendous support from Government and other donors in prompting the rural banking industry in Ghana. For instance the passing of the Apex Bank regulation, the setting up of the Data Centre, capacity training of its staff ,etc have all been achieved through government and donor support .
It is important to indicate that the success of the microfinance sector cannot be achieved without the active involvement of government and donors. However it is also important to eliminate government and donor interferences to ensure effective operations of the MFIs.
6.7 Strategic linkages
To improve outreach and impact, the Apex Bank has developed strategic linkages with institutions and projects to extend financial and non financial services to the rural areas. For example the Apex Bank is collaborating with the World Bank to extend financial assistance to clients of some selected rural communities without access to electricity to purchase solar equipment. Developing these linkages further reduces transaction cost and further enhances outreach to these areas since most of these areas have the presence of rural and community banks.
The microfinance sector should develop strategic linkages to enable other providers to ride on the back of the industry to efficiently impact on the lives of the poor.
7.0 RECOMMENDATION
To improve Microfinance delivery in the Sub – Saharan Africa through Knowledge sharing and policy implications the following recommendation are made:
- Governments must offer their support to the microfinance industry in helping to build infrastructure, human and other needed resources to enhance the activities of the microfinance sector.
- The regulation of the sector should be taken seriously and it should be done to ensure that it does not stifle the growth and impact of the sector.
- The various actors or individuals involved in the industry should consider training and retraining of their staff to enable them to perform their roles in an efficient and professional manner.
8.0 CONCLUSION
Microfinance delivery in Sub-Saharan Africa has gone through several changes over the past years. Although the sector has performed well, there are still more poor people without access to financial and non financial services within the sub region. The objective of improving access to finance can only be achieved through the strengthening of the microfinance sector which has proven to be a suitable tool for reaching the large unbanked population in the sub region. To realise the goal of financial inclusion, the microfinance sector should wake up to the task of knowledge sharing across borders to enable the industry to offer a more pragmatic and efficient service to improve the livelihood of the poor. This is one reason why the ARB Apex Bank has started a cross-border collaboration in the African region with the view to introducing rural banking to other countries in the Sub-region.
by Roderick Ayeh and Richard Addo
REFERENCES
- Business and Financial Times 2010: Global microfinanciers resutructure to adapt to the chaning economic enviroment
- Fiona Dwinger,2010 : Lessons in microfinance ; can the Asian Success Story be repeated in Sub Saharan Africa? www.consultancyafrica.com.
- Ghana Rural Finacial Services Project: Project Appraisal Document,2000
- Kristian Helmore, Sybil Chidiac and Lauren Hendricks,2009: Microfinance in Africa: state of the sector report
- Sethumadhavan,2007) www.indianmba.com/faculty_column/fc653/fc653.html
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