Money transfers and payments. RCBs participate in local and international money transfers, and government agencies use the RCB service outlets for salary and pension deposits. Clearing of checks for cocoa purchases is also an important service provided under the payment category.
Performance
Steadily increasing outreach and service delivery. Between 2000 and 2008 the number of depositors in RCBs grew at an average annual rate of 14 percent, and the number of borrowers grew at an average annual rate of 27 percent. The RCB network reaches about 2.8 million depositors and 680,000 borrowers, making RCBs the largest group of licensed financial service providers in rural areas. Clients of RCBs consist mostly of farmers, government employees, and small and micro-entrepreneurs. Mixed financial performance. The profitability and net worth of the RCB network steadily increased from 2000 to 2008. Network- wide capital is well above the minimum 10 percent required by the Bank of Ghana. In 2008, however, seven RCBs were insolvent, and the continued operation of poorly performing RCBs is a key issue facing the network. The relatively high ratio of nonperforming loans is another major factor affecting financial performance. In the sample RCBs, for example, the proportion of the loan portfolio that was in default for more than 30 days was 16 percent, compared with 3 percent for banks in their global peer group.
Lessons on rural banking The case of rural banking in Ghana points to the following lessons:
• Although community-based financial institutions such as the RCBs can play a key role in increasing access to financial services in rural areas, their small size can also make it challenging for them to become financially sustainable and compete with other financial institutions that enter the rural financial market. To be successful, they should be able to respond dynamically to changes in the business environment. These responses may include building linkages, being open to mergers, and bringing in external investors, if necessary.
• Small local financial institutions often cannot easily procure needed technical support (such as training and specialized technical assistance for product development and setting up of operational systems) from the market. Hence, initiatives to build local financial institutions must support the creation of strategic alliances that can either provide such services or facilitate their cost-effective provision. Apex institutions can play a crucial role in providing technical and financial services to small financial institutions.
• Apex institutions may find it difficult to achieve financial sustainability by providing services to members alone. Such institutions may have to also provide services to the public, including general commercial banking services. Care must be taken, however, to ensure that the business model adopted does not compromise the original mission—in this case, to increase sustainable provision of financial services in rural areas.
• The regulator needs to have the necessary skills, political autonomy, and financial resources to effectively regulate and supervise a large number of small financial institutions that are geographically dispersed. Often the central bank does not have the skills to undertake this task directly, and alternative models of supervision may have to be adopted. Even in the best circumstances, however, a certain number of institutions will fail, and the regulatory system needs to have the capacity to respond quickly to protect depositors and to prevent failure from lowering confidence in other institutions. Donor funding cannot sustain a supervisory regime in the long run, and recovery of all supervision costs through fees from the supervised institutions may not be a feasible option. Under these circumstances, adequate government funding for supervision would be critical for ensuring sustainable service delivery. n
For further reading: A. Nair and A. Fissha, “Rural Banking: The Case of the Rural and Community Banks in Ghana,” Agriculture and Rural Development Discussion Paper No. 48 (Washington, DC: World Bank, 2010).
Ajai Nair (
anair@worldbank.org) is program coordinator of the Agriculture Finance Support Facility in the Agriculture and Rural Development Department of the World Bank.Azeb Fissha (
afissha@worldbank.org) is a consultant with the Agriculture and Rural Development Department of the World Bank.
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