Rural credit market and local level development - case study of Nkoranza District, Ghana

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One of the major problems in rural development is lack of credit. In response to this, major bank branches were disseminated into rural district capitals, rural banking scheme was introduced and international agencies were involved indirect provision of credit to farmers and similar target groups. The outcome, however; is not generally satisfactory. The credit needs of the rural population are still not satisfied. Most farmers are dependent on informal sector loan which is considered exploitive and inefficient. The major problem, therefore, is through what channel these farmers will get better access to efficient credit services. In search of a solution to this problem a case study was conducted in a district called Nkronza, in Brong Ahafo Region of Ghana. Data was from collected various sources. These includes a base line survey conducted by spring students in 31 settlement covering 322 households and a series of .surveys conducted by the author involving as 64 households, in seven settlements, a survey of 83 susu participants in six communities, interview with seven susu collectors, and a survey of thirteen informal lenders and key informant interview with four bank managers. The role of credit in rural development and the basic assumptions made about the rural credit market such as existence of monopoly lenders, egalitarian formal sector lenders, and potentials of saving and credit associations were investigated. The result shows that provision of credit have significant impact on income, investment and input demand of households. It maximizes the use of abundant resources of the community. With regard to the supply of credit it was found 199 percent below demand. This was a major constraint to increase income of most farmers. The rural credit market is segmented on the line of wealth, resident and kinship. Interest rate varies across these segments reflecting difference in risk and cost of loan administration. The average nominal interest rate was found to be 39 percent. Most loans in the informal sector are inter-linked with the product market. Competition is fierce in this segment and evidence of monopoly is not found. Rather, informal lenders are found efficient, culturally suited, socially cared and also they care for their community. High interest rates are resulted from existing excess demand for credit. Because of this informal interest rate can better reflect opportunity cost of capital. The main weakness of moneylenders is their inability to mobilize savings. Other than that they are efficient and constitute the dynamic assets of the locality. In some of the rural settlements (usually with a population above 2000) there are some credit and saving associations who are serving the non-farm population. The basic aim of saving is re-investment. These associations, however, do not provide credit more than one can contribute in a month. They are, however; a potential channels to reach the non-farm population. The formal financial sector was found discriminatory on the basis of wealth, income and type of job. Poor farmers are generally excluded from the service. The sector is characterized by high default rates and corruption. Delays in loan processing increase cost of borrowing up to 8.7 percent above the interest rate payable. Formal sector mobilize savings but the interest it pay is below the level of inflation and it expatriates this savings out of the locality. Generally, as far as the production and distributive sectors of the economy is dominated by the informal sector, the financial sector will have similar features. In this case it is not possible to reach the rural disadvantage neither by formal nor informal institutions alone. Efficient financial services can only be provided if the two markets are integrated. This can be done by introduction of one man banking scheme, organization of informal lenders into lending groups and advancing of loans through the informal mutual credit and saving association. Development is basically a local affair and any measure which utilizes local dynamics will encourage growth and development at local level and vice-versa. If developing countries, generally, and Ghana particularly, want to reach the rural poor and ignite the engine of growth, they need to give the local dynamic agents their proper place. In this case integration of the informal finance into the formal finance system such as one man banking scheme, lending through arrangement organization of informal lenders into small action groups and advancing of loans through susu collectors for employees in the ‘informal’ sector is recommended.
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 Regional Planning and Management, 1994