The urbanization of rural banking in Ghana

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Initially, the rural banking system in Ghana was set up to cater for the credit needs of rural people and to inculcate in them the habit of making use of banking services. In recent times, rural banks have preferred operating in urban centres to operating in the rural areas; hence the influx of rural banks into city centres. BOG being the institution responsible for the supervision and control of banking in the country, has in certain cases had to take drastic measures, very unpleasant to the affected banks; to insist on their operating in the rural areas as stipulated by policy. The current study was therefore to find out the reason for the influx of RB’s into the urban areas; what factors entice them into these areas; what factors discourage their operations in the rural areas and whether the policy restricting their operations only to rural areas is still relevant. A random sample of four rural banks with both rural and urban agencies was therefore chosen and their operations before and after moving into the urban areas, were examined. A comparative study of the before and after urbanization situations was done in terms of deposits mobilized, loans granted, profit levels, assets and portfolio quality. The study revealed that after urbanization, deposit levels went up by as much as 1,830%; the least being 5 98%. Customer base also expanded between 84% and 162%. Advances granted went up by between 575% and 1,430%. Profits and Assets also increased tremendously after urbanization. It was also revealed that not less than 40% of the Total Advances, Assets and Customer base were held by only two urban agencies of the banks studied. An indication of the fact, that there is a high concentration of ‘strength’ in the urban agencies of these banks. It was, however, revealed by this study that portfolio quality declined by between 22% and 86% with urbanization, in all the banks studied. The conclusion therefore was that urbanization tremendously improved the performance of the rural banks. This therefore calls for a second look at the policy restricting their operations only to rural areas, with the view to enhancing the performance of the system as a whole. The present competitive banking environment calls for efficiency and this can be achieved if expansion occurs in viable areas, which in the case of the rural banks, is the urban centres. They should therefore be allowed to operate in the urban areas and rather be made to allocate a mutually agreed proportion of their credit to the rural dwellers.
A thesis submitted to the Board of Postgraduate Studies, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirements for the award of Master of Science degree in Development Policy and Planning, 2002