INTRODUCING RURAL BANKING TO AFRICA Richard Mettle Ado Head, Research & Marketing

1. INTRODUCING RURAL BANKING TO AFRICA Richard Mettle Ado Head, Research & Marketing ARB Apex Bank - Ghana OCTOBER 2010

2. INTRODUCTION • The mission of this delegation is to introduce to you the rural banking system which is currently operating very well after 34 years of its introduction in Ghana. • Other parts of the world, notably the Netherlands and the Philippines have had tremendous benefits out of their rural banking system. • The search for a system to tackle the financial problems of the rural dweller in Ghana started as far back as the 1960s under the Nkrumah regime.

3. During that period, the need for a veritable rural financial system in Ghana to tackle the needs of small scale farmers, fishermen, craftsmen, market women, traders and all other micro-enterprises was felt. The need for such a system was accentuated by the fact that the bigger commercial banks could not accommodate the financial intermediation problems of the rural poor as they did not show any interest in dealing with these small scale operators.

4. Attempts in the past to encourage commercial banks to spread their rural network and provide credit to the agricultural sector failed to achieve the desired impact. These banks were rather interested in the finance of international trade, urban commerce and industry. There was therefore a yawning gap in the provision of institutional finance to the rural agricultural sector.

5. The inability or failure of the commercial banks to lend on an appreciable scale to the rural sector was attributed to the lack of suitable security on the part of the rural dweller. Secondly, the centralised structure of the banking set up was such that vital decisions were taken at their head offices, making decentralisation less effective. The disadvantage of such a system was that it could not compete with local money lenders in terms of local knowledge, flexibility and speed of response for financial support from customers.

6. Thirdly, the branch network of many commercial banks cover mainly the commercial areas where business is thought or seen to be vibrant and did not reach down to the rural communities. Rural dwellers were therefore denied access to organised financial institutions in addition to being prevented from availing themselves of the opportunity of safe guarding their money and other valuable property that a bank provides.

7. The realisation that the existing framework for institutional credit did not favour rural development led to the search for a credit institution devoid of the disabilities of the existing banking institutions but possessing the advantages of the non-institutional credit organisations. This institution is what we call in Ghana the RURAL BANK.

8. CHARACTERISTICS OF RURAL BANKS • A rural bank is owned by the people in the rural community within which it operates. • It is permitted to operate within forty kilometres radius from its head office. • (This has now been relaxed for banks which have met the minimum capitalization and have the necessary internal control mechanisms for effective supervision)

9. It operates according to the dictates of the banking law and has primary and secondary reserve requirements. • Its shareholders are mainly from its catchment area. It has a board constituted among the shareholders and operates on the principles of the Companies Code, 1963 Act 179 and the Banking Law 2004, Act 673. The ARB Apex bank regulations passed by the parliament of Ghana also regulates the rural banks.

10. Each rural bank is also registered as a limited liability company and requires a banking licence and a certificate to commence business before it is permitted to operate. • It has a minimum paid-up capital set by the Central Bank. • There are existing guidelines for establishing a rural banking relating to the following:-

11. Eligibility / Qualification criteria • Ownership and capitalisation, including limitation to share ownership • Regulations of the proposed company • Feasibility report – business plan and financial projections for the first 5 years

12. Permissible activities • Operational requirements • Viability (based on 5 year projection of income statement and balance sheet) • Staffing requirements • License • Processing fee and licensing fee • Initial training • Equipment requirements and specifications

13. OBJECTIVES OF THE RURAL BANKING SYSTEM • Rural banks were established with the following key objectives:- • To mobilise savings in the communities from where they operate • To grant credit to customers who deserve them • To stimulate economic activities in their catchment areas • Contribute to the socio-economic development of their catchment areas • Make profit for their shareholders

14. WHAT HAS BEEN THE IMPACT OF THE RURAL BANKS IN GHANA • The rural banking network controls about 9% of total domestic deposits of the banking sector in Ghana. They mobilise savings from their catchment areas and lend them out to deserving customers in the same area. They help existing enterprises in the rural communities to improve upon their performance and promote new economic activities thus assisting to enhance standards of living.

15. They contribute to the socio-economic development of their catchment areas by using part of their profits to support brilliant but needy students, offer significant support for street lighting, construction of bore holes for potable water, construction of school buildings and health care facilities among many others.

16. Indeed the contribution of RCBs towards corporate social responsibility in total far exceeds the contributions of all the other banks put together year-on-year. It is in this light that the clamour for the establishment of more rural banks keeps raging from one community to the other. It is therefore not surprising that the rural banking system constitutes the largest banking network in Ghana with over five hundred and ninety-five (595) offices dotted across the face of Ghana.

17. The growth of the rural banking system is depicted as follows: Source: Research Department, Bank of Ghana

18. INVESTMENTS BY THE RURAL BANKS • As part of the mandatory requirements by the Central Bank, all banks were required to maintain primary and secondary reserves. The secondary reserves were normally used as investments in government paper, mainly treasury bills. The table below shows the total lending to the government by the big commercial banks and the rural banks from 1997 to 2001:-

19. Source: Research Department, Bank of Ghana

20. INSTITUTIONS WHICH HAVE HELPED IN THE DEVELOPMENT OF THE RURAL BANKING SYSTEM IN GHANA • Up to this point in time there are several institutions which have helped the rural banking system to thrive in Ghana. Key among them are:- • The Bank of Ghana • The Association of Rural Banks • The ARB Apex • The World Bank • International Fund for Agricultural Development (IFAD) • Danish International Development Agency (DANIDA) • African Development Bank

21. The Bank of Ghana • The Bank of Ghana pioneered the establishment of rural banks and had the first one established in 1976. Since then, a number of rural banks have been established. • Bank of Ghana established a Rural Finance Inspection Department which was later subsumed under the Banking Supervision Department.

22. The Central Bank also provided banking services to the rural banks by clearing their cheques, supplying them with specie as well as inspection services. In 1991, the government initiated a Rural Finance Project (RFP) which involved the restructuring of rural banks and provision of on-lending funds to those rural banks found to have met certain set criteria.

23. The Central bank provided the necessary support and initiative towards the establishment of the Apex structure for the rural banking system. It continues to regulate the rural banks by assisting to develop regulations that guide the relationship between the Apex Bank and the rural banks. Throughout the life of the rural banking system, the Bank of Ghana has nurtured its growth and development, developing the necessary sanctions and penalties that go with default.

24. In 1999, rural banks which were distressed beyond redemption arising out of management and operational problems, had their licences withdrawn by the Bank of Ghana as these rural banks could no longer meet withdrawal demands. With the establishment of the ARB Apex Bank, virtually all the services that the central bank used to provide have been ceded to this new ‘mini central bank’, though with some measure of difficulty.

25. The rural banking system was pillaged by the orthodox banks when the central bank decided in 1994 that it would no longer clear cheques for and on behalf of the rural banks and had to rely on the big commercial banks to clear their cheques, which in effect meant asking your competitor to render certain services for your progress. Your guess is as good as mine.

26. The Association of Rural Banks • The rural banking system which came into being in 1976 sought to render invaluable financial services in the rural communities which had been neglected by the commercial banks. In order to promote the aims and objectives of the rural banking system, the Association of Rural Banks (ARB) was established in 1981 with the following aims and objectives:-

27. To provide and exchange information on rural banking services in Ghana and to serve as a forum for the discussion of common problems of rural and community banks and their possible solution. • b. To find ways and means by which the ARB can contribute to the development of agriculture, commerce, industry and the general well being of rural areas in Ghana.

28. c. To ensure that rural and community banks are seen as instruments of national development in the rural areas.

29. The ARB since its establishment has done a lot for the rural banking system in Ghana. Among these are:- • Conducting training for rural banks’ directors, managers, accountants and project officers, clerks and cashiers from 1981 to 2002, when finally the ARB Apex bank was established to take over the training function.

30. Advocating for the granting of a 10 year tax holiday for rural banks. • Advocating for a reduction in corporate tax from 35% of profits to 8%. • Advocating and clamouring for the establishment of the ARB Apex Bank which is the mini central bank for the rural banks in Ghana.

31. Sensitising rural and community banks throughout the country about the need to establish rural banks in areas where financial services are absent. • Educating staff and directors of rural banks on the HIV/AIDS pandemic in collaboration with the Ghana Aids Commission. This is being done with the view to protecting staff, management and shareholders of RCBs so that they do not lose them through this ailment.

32. The ARB Apex The Association of Rural Banks which came into being in response to emerging needs of rural banks clamoured for the establishment of the ARB Apex Bank as a further evolutionary response to the felt needs of rural banks. After the establishment of the first rural bank in 1976, other rural banks were established as follows:-

34. However, due to manpower, management and operational problems, as well as the harsh rural environment, these conditions did not easily offer the impetus for the rural banks to thrive in a number of cases. For example, between 1999 and 2000, the Bank of Ghana withdrew the banking licences of 23 rural banks.

35. The various operational bottlenecks, key among which was the decision in 1994 by the Bank of Ghana that it would no longer perform cheque clearing functions for rural banks, compelled rural banks to call for the establishment of the ARB Apex Bank since the commercial banks which they relied on to clear their cheques, specie supplies and treasury functions became unreliable, the reason being that they were competitors of the rural banks.

36. The commercial banks frustrated the rural banks by delaying their clearing of cheques, giving them lower denomination of currency supplied, mutilated notes and in some cases enormous quantity of coins were supplied to the rural banks to be used in paying their customers.

37. Delays in placing funds for investment purposes led to losses in income for the rural banks. The cumulative effect was that confidence in the rural banking system was eroded. As a result of several consultations that the Association of Rural Banks and the Central Bank had with the World Bank aimed at establishing an apex body for the rural banks in Ghana, a team was commissioned in 1996 to explore the legal viability and banking dimensions of such an apex body.

38. In 1998, a consulting firm was commissioned to examine the feasibility of establishing an Apex Bank. The conclusion obviously is the ARB Apex Bank we have today. The functions of the bank, which is to perform banking and non-banking support services in order to improve the operational efficiency and remove the operational bottlenecks which had hindered the growth of the rural banks included:

39. Clearing of cheques for the rural • banks • Provision of specie • Development of products • Inspection • Computerisation • Training • Funds management • Sourcing of funds for on-lending by • the rural banks

40. Since its establishment, the bank has supported the rural banks through the performance of these functions. Apart from supporting the rural banks, it has also introduced a star product called the Apexlink which is patronised by customers to transfer money domestically to every nook and cranny where services of the rural banks are available.

41. Foreign money transfer products like the Western Union, Vigo and Money gram are also in operation at all rural banks and the offices of the ARB Apex Bank across the country. With the establishment of the Apex Bank, the operational bottlenecks relating to cheque clearing, specie supply etc have completely evaporated and the rural banks are growing from strength to strength as depicted in the two tables below:-

42. TABLE 1

43. TABLE 2

45. World Bank • The Rural Finance Project (1991 – 1994) The World Bank’s support for the rural banking sector became very significant from the early 1990’s when the Rural Finance Project (RFP) was launched.

46. This project saw the implementation of restructuring audits of all the rural banks with the view to ascertaining their operational efficiency and putting in measures to address all identified inefficienciesand operational bottlenecks.

47. As a result of the RFP, Messrs Sycip, GorresVolayo and Co. (SGV & Co.) of the Philippines working in collaboration with Arthur Andersen Consultants were engaged by the project to assist the Association of Rural Banks to conduct a Training Needs Assessment (TNA) and also develop training modules to address the felt training gaps of the rural banking network.

48. At the end of the RFP in 1994 the under listed training modules had been developed by the Andersen Consultants:- • Credit Investigation • Loan Monitoring and Supervision • Loan Recovery Procedures & Strategies • Annual Planning & Budgeting

49. Management Information Systems • Bank of Ghana Reporting Requirements • Accounting for Non-Accountants • Interpretation of Financial Statements • Organisation Principles and Processes • Management Decision Making

50. Policy Formulation and Implementation and Other Board Functions • Resource Mobilisation • Funds Management • Internal Control Systems • Cost Reduction Programme • Legal Aspects of Banking