History of rural banking in Ghana
The first work on rural banking in Ghana was conducted by the bank of Ghana in
1970 (BoG) and this was into rural credit scheme in Ghana. This was after the Bank of
Ghana had recognized the need for the mobilization of surplus savings in the rural
communities for effective utilization by farmers and local industrialists. The study
revealed a noticeable gap in the existing banking and credit systems, with insufficient
funds flow through these banks to the large number of small borrowers who needed the
credit most. Upon these findings, the Bank of Ghana in 1973 commissioned a detailed
study into the possibilities. The outcome of the study was the establishment of rural
banks in Ghana based on the Philipino model. A Bank of Ghana team spent several
months in the Philippines studying in depth the operations of the rural banks in the
Philippines. The Philippines was chosen because it was one of the few countries which
had successfully operated such banks on a fairly large scale. Another reason was that the
Philippines stage of economic development was relevant to ours.
As a result of the study, the BoG sponsored the establishment of the first rural
bank at Agona Nyarkrom in the Central region of Ghana in July, 1976. As a result of the
numerous problems that arose after the establishment of the rural banking system, many
were those who were apprehensive of the feasibility studies conducted by the Bank of
Ghana (BoG) prior to the establishment of these banks.
By March, 1992 data showed that out of the one hundred and twenty-two (122)
existing rural banks, ninety-eight (98) had became distressed and were unable to refund
depositors’ money on demand. The poor performance and the deteriorating situation of
these banks sort to undermine the whole concept of rural banking. BoG had to come in
quickly to rescue these banks. By January 1994, BoG had used sixty one thousand, one
hundred Ghana Cedis (GH¢61) of the tax payers’ money to pay depositors of these
distressed rural banks whose total deposit stood at eighty two thousand, six hundred
Ghana cedis (GH¢82,600). This was done to preserve the confidence of the depositing
public in the rural banking system. (Kudiabor, 1974).
Rural banking operations
It is the above which compelled Hartrut Kohlhoff (1985) in collaboration with the
Rural Banking Department of the Bank of Ghana (BoG) to come up with the Operational
Manual of the Rural Bank. This dealt with how a Rural Bank could be established within
the context of the Companies’ Code and the Banking Act. It further discussed financing
the appointment of directors and chairmen of the Board of Directors and continued to
design an operational chart for a standard rural bank. The operational manual also
identified the various positions and the job requirements of each position in a standard
rural bank. The manual, as an extensive study, touched on virtually all areas of rural
banking. It could have been more useful if the manual had been produced earlier than
1985. It could have saved the rural banks set up earlier from the setbacks they suffered
due to managerial inefficiency. The various positions in the rural banking hierarchy did
not know their roles assigned them.
The Bank of Ghana has streamlined Rural Bank lending operations to ensure that
Bank credit actually benefits the small scale rural producer and the rural community.
Applications are accepted from individuals, groups, associations, and companies.
Recommendations to reject an application must be justified by specific and clearly stated
reasons and cannot be based on vague suspicions. Before granting a loan to a group, the
Bank requires that there be mutual trust and respect among members. In the case of a
group loan approval, members are held jointly and severally liable. The group cannot
exceed 20 members, and the group leader must have a clean loan record. The Bank of
Ghana has developed a mandatory sector allocation for Rural Bank loans. The allocation
ensures that the bulk of the resources go to agriculture, the priority sector in Rural Bank
lending. To ensure that resources assist small farmers, the Bank of Ghana requires that
the maximum acreage a loan-eligible farmer can cultivate is 10 acres for vegetables and
100 acres for staple crops. The Rural Banks try to reduce the cash element in the loans to
the minimum possible to prevent the diversion of funds for purposes other than those for
which they are granted. The Banks arrange for inputs to be made available in kind (raw
materials, seeds, fertilizers, equipment and machinery, etc). Loan repayment conditions
are determined with reference to the borrower’s capacity to repay. A “grace period” is
allowed between the loan approval date and the time the borrower is expected to generate
sufficient income to repay the loan. During the “operation period” of the loan, the Bank’s
Project Officer monitors the borrower to ensure proper use of funds and punctual
repayment. Routine and emergency visits by the Project Officer are common during the
operation period of the loan. Rescheduling may be allowed if there are circumstances
which the loans committee or board of Directors accepts as “unforeseen developments.”
If there is default on the loan, the case is sent to the Bank’s lawyer(s) for action. (The
Bank of Ghana’s Operational Manual for Rural Banks, 1985).
By 1990, the Rural Banks were experiencing negative profitability resulting in
capital inadequacy and, in some cases, the inability to meet depositors’ withdrawal
demands. The Bank of Ghana ordered a restructuring of the Rural Banks. By December
of 1991 all of the Rural Banks had undergone diagnostic study conducted by outside
consultants. The restructure was designed to determine financial strength, organizational
capability, and management status in line with existing statutory requirements. The
Banks updated and standardized accounts and procedures. The Banks introduced internal
control systems and management information systems. After the restructuring process,
the number of Rural Banks meeting the capital adequacy requirement increased from 2 to
55. The Bank of Ghana has instituted measures to maintain public confidence in the
remaining mediocre and distressed Rural Banks (Bank of Ghana 1995). Today, the Rural
Banks are still given the opportunity to determine who should benefit from their credit
resources. There is substantial anecdotal evidence of misdirection and misapplication of
rural credit by the Rural Banks and the rural people. Many rural banks appear to give
credit to people who do not fall into the Bank of Ghana target groups. It is not uncommon
to see many credit recipients spending borrowed credit on land litigation and funeral
ceremonies instead of productive ventures. The Bank of Ghana initiated the Rural Bank
system with the hope that small-scale rural producers and small towns would benefit
from the new credit resources. It is uncertain whether or not the Rural Banks are fulfilling
the basic functions for which they were created. (Amonoo E., 1977)
Problems and prospects confronting Rural Banks
Bonso Emmanuel Yao (1978) conducted research into the problems and prospects
confronting the rural banking scheme. The purpose of the study was to examine the
problems likely to confront the rural banking enterprise with the view to assessing its
prospects for success. Specifically, the research focused on the credit problems facing the
rural farmers and the small-scale entrepreneurs and how the rural banking could
effectively solve such credit problems as well as the strategies to be adopted in order to
ensure successful operation of the scheme.
The main finding of the research was that the lending policies and activities of the
existing banking system operated to the disadvantage of the rural sector and that the
proposed rural banking system should go a long way to fulfill the financial needs of the
rural sector. However, for the rural banks to become effective instruments for rural
development, it was necessary for the government and the BoG to take certain measures
early in the development of the new banking system in order to deal effectively with the
problems awaiting the scheme.
Bonso Emmanuel Yao recommended the following measures:
A National Credit Policy should be established to ensure equitable allocation of
loanable funds to the rural sector to stimulate economic development of the areas
where such banks would be established.
A strategy of encouraging the establishment of viable small-scale rural industries
should be embarked upon to ensure rapid development of the rural communities.
Certain types of industrial activities should be reserved exclusively for the sector.
A generous package of incentives should be provided to investors in the rural
areas to provide employment for the rural dwellers.
Attempt should be made to spread the rural banks evenly throughout the country
so as to be effective instruments for rural development.
The study was a very good attempt to discover the impediments that would
hamper the development of the rural banking system, yet it failed to tackle the important
issues like the effectiveness of savings mobilization efforts of the rural banking system
and how the system was going to extend credit to the rural dwellers.
Bank of Ghana (1985). Bank of Ghana Operational Manual for Rural Banks.
Accra: J'piter Printing Press Ltd.
Kudiabor, C.D.K. (1974). Policy Objectives and Strategies for Integrated Rural
Development in Ghana. Accra: Ghana Universities Press.
Hartrut Kohlhoff, (1985). Operational Manual of the Rural Bank. Accra: Bank of
Amonoo, E. (1977). A Strategy for an Integrated Rural Development in Ghana.
Accra: Ghana Universities Press.
Bonso Emmanuel Yao, (1978). The Problems and Prospects Confronting the
Rural Banks. Accra: Ghana Universities press.