Credit Delivery System in District Development: a Study of Rural Banks in the Bosomtwe-Atwima Kwanwom District

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The absence of specially tailored financial services, to cater for the needs of the rural people and small self-employed, limits the developmental role of financial services in Ghana. The dearth of credit institutions to rally local savings (that is to encourage the rural people to save and to manage savings) and to create the ability to use capital wisely, resulted in the establishment of rural banks. Credit supply and distribution by rural banks, as well as its inherent problems have been little investigated and understood. Experiences of the Bosomtwe Rural Bank (BRB) and the Atwima Rural Bank (ARB), in the Bosomtwe-Atwima-Kwanwoma District, have been reviewed by this study. The objective of the study is to examine rural banks and accessible and affordable credit supply in district development. The main aim is to use the necessary information to make suggestions to redirect focus and derive steps as to how to do it. Data for the study were collected from field surveys and secondary sources. Two questionnaires were administered to the two rural banks in May 1998 (from 8 - 15). A second survey covered 100 questionnaires administered in five purposively sampled zones of rural bank credit activities. Twenty respondents per zone (12 randomly sampled borrowers and 8 non-borrowers systematically sampled) were interviewed. Other supplementary questionnaires, complementary to the major survey but eliciting general and specific information about rural bank credit supply, were directed to opinion leaders, District Assembly Departments, Bank of Ghana, the Association of Rural Banks and the general public in the district. They also provided cross check on the major survey and vice versa. Based on empirical evidence from these two rural banks and field surveys in the study district and using the multi-disciplinary approach, in conjunction with operational ratios and asset ratios, the study analyzed the rural banks’ financial and outreach performance. The study therefore provides an insight into the main factors responsible for weakening credit provision in a rural district. It also presents a practical understanding of the real difficulties faced by rural banks and the reasons why conventional banks may stay away from lending to rural small businesses. The following findings are of particular note: 1. Funds of the district’s rural banks are supplied mainly by local private sources through purchase of shares, deposits and commercial borrowing. 2. Ignorance among both customers and non-customers about the objectives of the rural banks exists in the district. 3. Influence-oriented management structure exists but appears to marginalize both the financial welfare of the banks and the welfare of the shareholders. 4. An approach that treats rural people as commercial clients and charges real costs of services is adopted by the rural banks. 5. The BRB attained and maintained a zero subsidy dependency index (SDI) for non-agricultural loans while the ARB had a negative SDI in 1997. 6. Both banks pursue a strategy of close proximity to their clients through mobilization centres and information dissemination. 7. Growth in voluntary savings mobilized by the banks surpassed their paid-up capital but has been increasing at a decreasing rate. 8. Policies restricting minimum deposits to 20,000.00 cedis tend to technically knock out low income earners from the two rural banks in the district. 9. The costs of funds generally are high in the district and show increasing trends for BRB and a decreasing trend for ARB. 10. The rural banks in the district do a limited amount of lending which prejudices substantial long term investment. 11. Generally, operations of the rural banks in the district continue to grow but default rates also seem to rise throughout. 12. There exists a lack of decentralized management able to respond to local situations quickly in the operational set up of the rural banks under study. 13. The rural banks under study have reached out to a relatively small number of people. Women appear to be invisible in the banks’ credit schemes and deposit services. 14. A dichotomy of interests exists between the District Assembly and the rural banks which give rise to weak linkages. The study recommends client involvement in defining and deciding issues, developing strategy, receiving feedback and assessing results of rural bank operations. The three dimensions of the recommendation are capacity building; legitimacy and or participation; and impact of rural bank credit and savings operations. The study concludes that the rural banks are oriented to poverty alleviation, they show rural preference and promote development of human capabilities in addressing both income deficits and human poverty in the district. However, they stand in need of evolving a more suitable credit structure (lending policies, appropriately defined corporate strategies, objectives and practices) in order to be more effective in mobilizing the rural population of the district for development purposes.
A thesis submitted to the Board of Postgraduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirement for the award of the Degree of Master of Science in Development Planning and Management, 1998