Rural Banks in Ghana Collapsing

Rural banks in Ghana are grappling with huge challenges in managing their loan loss reserves due to bad loans and poor management systems applied by the banks, the paper’s financial bureau has established.

As a result, majority of these Rural and Community Banks (RCBs) have been rendered insolvent and could soon fold up if austerity measures are not taken to reverse the trend.

The situation, Today checks revealed, has affected the drive towards providing quality banking facilities to the rural folks in Ghana.

The initial poor performance of RCBs stems from both unfavourable operating environment and capacity constraints. These lead to the absence of clear prudential regulations in both financial and non-financial sectors, leading to excessive direct lending requirements, which limit flexibility in managing risk exposures.

In a report intercepted by Today titled “Rural Banking: The case of Rural and Community Banking in Ghana,” it was indicated that the relatively high ratio of non-performing loans is a major factor affecting financial institutions’ performance in the country.

“In the sample of RCBs, the proportion of the loan portfolio that was in default for more than 30 days was 16 percent, compared with three (3) percent for their global peer groups, according to data reported in the Microbanking Bulletin.

Similarly, in the RCBs, loans in default for more than a year were 3.5 percent, compared with 1.5 percent in the peer groups, indicating that “This indicator is a good proxy for loan losses because most loans that have been in default for more than a year are generally not paid back at all.”

Although capacity constraints in rural areas limit the scope of operation of local financial institutions to some extent, targeted investments in building the capacity of service providers can have positive payoffs.

The report findings, however, suggested that initiatives to build local financial institutions should have significant capacity-building components.

Currently, the RCBs network reaches about 2.8 million depositors and 680,000 borrowers, making RCBs the largest group of licensed financial service providers in rural areas.

According to market statistics, RCBs have a market share of more than 65 percent of depositors and 48 percent of borrowers in rural areas.

The existence of RCBs’ increasing outreach to underserved areas has significantly contributed to addressing credit constraints in rural areas. Between 2000 and 2008, the number of depositors grew at an average annual rate of 14 percent, and the number of borrowers grew at an average annual rate of 27 percent.

Realizing the challenges in accessing credit within the rural communities and the capacity exhibited to create and manage their own financial institutions, it has become imperative that government provides direct support to the institutions.

“For RCBs to have a financial operation that aims to be profitable requires a varied ownership structure, which currently is lacking in the rural banking system in Ghana. The growth of the network is constrained by the RCBs’ location-specific ownership structure, which limits the ability of the institutions’ managers and owners to propose mergers and acquisitions to stay profitable and efficient,” the findings stated.

The structure on which the rural banks are operating currently should critically be understood and worked at especially, even when a good legal, policy, and regulatory environment are provided; it is possible that a number of institutions could fail.

“Donor funding for supervisory activities cannot sustain a supervisory regime in the long-run, and mobilization of private funding to supervise services delivered to poor clients is not a feasible option. Government resources are thus fundamental to ensuring adequate supervision of services delivered to poor clients, and donor funding should complement direct government resources allocated for supervision,” the team stated in their report.

The study, however, recommended and challenged government, Bank of Ghana and the Apex Bank, regulators in the industry to challenge RCBs to become more competitive to retain their mission of providing services to clients in rural areas.

Many financial institutions are expanding into the rural financial market in major ways, often targeting clients of the rural banks and their personnel. In this situation, the RCBs should not try to seek protection against this competition.

Rather, these competitive market conditions should stimulate the RCBs to become innovative and more efficient in an attempt to strengthen their position in the financial market. Some banks, motivated by their competitors, have undertaken measures to improve their competitiveness and improve their performance.

At the network level, the ARB Apex Bank should proactively seek sustainable solutions for weak RCBs with very small capital and deposit bases. Some may have to be merged with another willing RCB or forced into liquidation.

“The Bank of Ghana has delegated some supervisory functions to Apex Bank, consistent with international good practice. Direct supervision of relatively small institutions, such as RCBs, is not a feasible and financially sustainable option for central banks. The arrangement is weak, because of resource, capacity and structural constraints. The BoG, along with the GoG, needs to immediately address these issues to ensure RCBs’ adherence to regulatory standards and thereby protect consumers,” the findings stated.

Although, the Government of Ghana (GoG) has played a remarkable role in facilitating the creation and growth of the RCB network, it has successfully changed many of the regulations that constrained the growth of the RCB network. Some gaps, however, remain unfilled.

The GoG should ensure that adequate resources are available for supervising RCBs and compensating them when they are called upon to deliver public programs. It should also consider additional measures to protect consumers, such as deposit insurance and financial literacy programs.