Practical Challenges of Rural and Micro Finance Institutions in Ghana Implication for Development and Performance of the Industry

The allocation of resources over the past years has been concentrated in the major cities and urban centers to the neglect of most rural areas.

1. Introduction 

The allocation of resources over the past years has been concentrated in the major cities and urban centers to the neglect of most rural areas. Hence, the poverty situation in rural Ghana is serious. This has fuelled the rate of rural-urban migration with its associated problems. The poverty situation in Ghana has caught the attention of successive governments in Ghana as well as non-governmental organizations (NGOs) to resource the rural folks. Ghana has over the years used rural banks as a conduit to channel aid funds to defined targets. Some of the schemes are Rural Enterprise Project (REP), Small Holder Credit Input, Supply and Marketing Project (SCIMP), Land Conservation and Rehabilitation Project (LACOSERP), Community Investment Fund (CIF), Food and Agriculture Budgetary Support (FABS) etc.

Before the establishment of the first rural bank in Ghana in 1976 the existing formal banking system– owned and managed by expatriates- was usually located in big buildings on the high streets of the major towns which essentially catered for the needs of the government, the big external trading firms, some literate wealthy Ghanaians and some senior Civil servants (Asiedu- Mante, 2011). According to Asiedu – Mante majority of Ghanaian, non-literate and less affluent, feared to step foot in those building  and  had  virtually  no  access  to  institutional  credit  and  other  banking  facilities.  Most Ghanaians were at the mercy of moneylenders who charges outrageous interest rates. In the history of microfinance, Microfinance Institutions have been the first to identify the vast un-served demand for microcredit in developing countries, develop methodologies for delivering small loans, and begin credit programs for the poor and recovering (Delfiner et al 2007).

Rural Banking in Ghana takes its origin from the early 1970s. Prior to that period, the main operators in the rural financial market comprised branches of commercial banks, credit unions as well as other entities in the informal sector such as money lenders, traders and susu collectors (Asiedu- Mante 2011). The traditional commercial banks failed to be attracted to the rural sector because they believed that the rural folks were mostly of the low-income group, and were scattered over a wide and almost inaccessible areas. This coupled with the fact that such rural poor could not provide the required collateral security necessary to support effective commercial financial operations, served as a disincentive to the commercial banks. Since 1976, the number of registered rural banks in the country has grown to 135 (BOG, 2011).

Avenor Rural Bank was established in 1982. This was in response to the need and the concern to make institutional credit and other formal financial and banking services easily available to the people of Akatsi and its environs. It has its headquarters at Akatsi in the Akatsi South District in the Volta Region. The main purpose of its inception was to help inculcate the habit of saving into the rural folk within its catchment areas and alleviate rural poverty by granting credit to the people. Today, the bank has five (5) agencies in the Volta Region of Ghana. The operations of the bank are mainly focused on income generating activities by advancing loans to its customers, especially, women to help them start businesses on their own.

In an article titled ―Rural Bank in Ghana collapsing Ampah (2010) indicated that rural banks in Ghana are grappling with huge challenges in managing their loan loss reserves due to bad loans and poor management systems applied by the banks. As a result, majority of these Rural and Community Banks have been rendered insolvent and could soon fold up if austerity measures were not taken to reverse the trend. The article indicated that the poor performance of Rural and Community Banks stemmed from both unfavorable operating environment and capacity constraints. Rural banks have unfavorable environment to mobilize scattered rural incomes at a high cost into savings, and lend to the people with virtually no collateral to support such credits. It is therefore, imperative to put in place legitimate policies and procedures that will ensure among other things that:

I.    The proper authorities grant credit;
II.   Credit goes to the right people;
III.  Credit is granted for productive activities;
IV.  The appropriate size of credit is granted;
V.    Credit is used for the purpose for which it was granted;
VI.  Credit granted is fully recovered;
VII. There is adequate flow of management information within the organization to monitor each credit activity.

2. Literature Review

​2.1 Definition of Micro credit

Microcredit is recognized as the practice of offering small, collateral – free loans to members of cooperatives who otherwise would not have access to the capital necessary to begin small business (Hossain, 2002). According to Yunus (1998), credit should not be seen as a luxury for the rich, it should be an opportunity for all: ―Just like food is; credit is a human right‖.  It‘s not people who aren‘t credit-worthy. Its banks those aren‘t people-worthy‘.

2.2 Models of Microfinance

Microfinance  since  its  inception  has  evolved  in  different  parts  of  the  world,  where  the  poor experience different needs, political, sanitary and environmental concerns. Various Entities have been setup to provide support to the booming industry, considering just India growing at 28% to 47% from 2003 to 2007 in loan disbursements. There are 2 general forms of microfinance models. The first and foremost is the Indian microfinance model that was started by Prof. Muhammad Yunus, winner of Nobel Peace Prize 2006. The next is the Latin American Model that emerged due to the variation in demographics of the Latin American compared to Asian regions.

2.3 Source of Finance for Microfinance Institution

Microenterprises generally cover their initial capital needs with the entrepreneur‘s own financial means and short-term credits from banks and suppliers. As a consequence they have high debt equity gearing ratio and low liquidity (OECD, 2003). Equity is provided by personal means or by contributions of informal finance from friends and family. Seed and early stage Venture Capital financing is available only for innovative start-ups with high growth potential. In addition many entrepreneurs do not seek such investment because it may entail a dilution of their ownership. The various forms of debt finance remain the main source of external finance for microfinance (Berger & Udell, 1998).

2.4 Credit management

Credit Management refers to the efficient blend of the four major credit policy variables to ensure prompt collection of loans granted to customers and at the same time boost their confidence in and loyalty to the bank (Van Horne, 1995).

I.     Assessment of the credit culture,
II.    Portfolio objectives and risk tolerance limits,
III.   Management information systems,
IV.    Portfolio segmentation and risk diversification objectives,
V.     Analysis of loans originated by other lenders,
VI.   Aggregate policy and underwriting exception systems,
VII.  Stress testing portfolios,
VIII. Independent and effective control functions,
IX.   Analysis of portfolio risk/reward trade-offs

2.5 Principle of lending

Gaurav (2010) identified general principles of good lending which every banker follows when appraising an advance proposal as follows:

​I.     Safety
II.    Liquidity 
III.   Purpose
IV.   Profitability
V.    Security
VI.  Spread
VII. National Interest, Suitability

2.6 Credit appraisal techniques

Guidelines for Commercial Banks for Pakistan Banks indicated Banks must operate within a sound and well-defined criteria for new credits as well as the expansion of existing credits. Credits should be extended within the target markets and lending strategy of the institution. Before allowing a credit facility, the bank must make an assessment of risk profile of the customer/transaction. This may include:

a) Credit assessment of the borrower‘s industry, and macro-economic factors
b) The purpose of credit and source of repayment
c) The track record / repayment history of borrower
d) Assess/evaluate the repayment capacity of the borrower
e) The Proposed terms and conditions and covenants
f) Adequacy and enforceability of collaterals
g) Approval from appropriate authority

2.7 Loan policy

Guidelines for Commercial Banks for Pakistan Banks indicated the senior management of the bank should develop and establish credit policies and credit administration procedures as a part of overall credit risk management framework and get those approved from board. Such policies and procedures shall provide guidance to the staff on various types of lending including corporate, SME, consumer, agriculture, etc. At minimum the policy should include:

a) Detailed and formalized credit evaluation/appraisal process
b) Credit approval authority at various hierarchy levels including authority for approving exceptions
c) Risk identification, measurement, monitoring and control
d) Risk acceptance criteria
e) Credit origination and credit administration and loan documentation procedures
f) Roles and responsibilities of units/staff involved in origination and management of credit
g) Guidelines on management of problem loans

2.8 Credit Administration

Guidelines for Commercial Banks for Pakistan Banks (2010) indicated ongoing administration of the credit portfolio is an essential part of the credit process. Credit administration function is basically a back office activity that support and control extension and maintenance of credit. A typical credit administration unit performs following functions:

a) Documentation
b) Credit Disbursement
c) Credit monitoring
d) Loan Repayment
e) Maintenance of Credit Files
f) Collateral and Security Documents

2.9 Loan monitoring

Credit risk monitoring refers to incessant monitoring of individual credits inclusive of Off-Balance sheet  exposures  to  obligors  as  well  as  overall  credit  portfolio  of  the  bank.  According to the Guidelines for Commercial Banks for Pakistan Banks, Banks need to enunciate a system that enables them to monitor quality of the credit portfolio on day-to-day basis and take remedial measures as and when any deterioration occurs. Such a system would enable a bank to ascertain whether loans are being serviced as per facility terms, the adequacy of provisions, the overall risk profile is within limits established by management and compliance of regulatory limits. Establishing an efficient and effective credit monitoring system would help senior management to monitor the overall quality of the total credit portfolio and its trends. Consequently the management could fine tune or reassess its credit strategy/policy accordingly before encountering any major setback. The banks credit policy should explicitly provide procedural guideline relating to credit risk monitoring. At the minimum it should lay down procedure relating to:

I.    The roles and responsibilities of individuals responsible for credit risk monitoring
II.   The assessment procedures and analysis techniques (for individual loans & overall portfolio)
III.  The frequency of monitoring
IV.  The periodic examination of collaterals and loan covenants
V.   The frequency of site visits
VI. The identification of any deterioration in any loan

Impact of Microfinance on the Rural Economy

The introduction of microfinance has in many ways impacted on the rural economy and brought about many changes in agriculture, rural housing, women empowerment and savings, reduction in vulnerability of the poor to adverse circumstances, increased household consumption and reduced income poverty. The development of the agriculture sector in any economy has been recognized as very important in attempts to reduce rural poverty. It requires the infusion of capital into the rural economy to enhance their capacity to acquire the needed technology to enhance production. In countries such as Ghana, Uganda, and Bolivia where agriculture development is central to rural poverty reduction there has been a renewed interest in finding the best ways in providing financial intermediation that would ensure sufficient supply of funds to the sector. Since most conventional banking institutions are traditionally very reluctant to enter the agriculture sector microfinance institutions have emerged to fill the void.

To mitigate these problems many Rural and Community Banks have been encouraged by successive Ghanaian governments to establish branches in the rural areas to provide financial intermediation to these poor rural dwellers that are mostly into agriculture. The availability of microfinance facilities also enables these farmers and fishermen to better negotiate business arrangements with buyers and processors as they do not now depend on these buyers for credit to do their business.

The poor are generally vulnerable to changing circumstances and microfinance helps to reduce their vulnerability. Microfinance helps borrowers reduce their vulnerability against adverse circumstances by building up household assets. These can be disposed-off if necessary to raise funds in times of hardships. These assets can also be used as security when they also seek for credit from more conventional financial institutions.

3 Data Analysis and Discussion of Results

3.1 Source of data

The  primary  source  of  data  collection  was  employed  through  the  use  of  questionnaires.  The researcher used both quantitative and qualitative methods of data collection to gather the data. With the help of the credit officers of the bank, the loan customers were interviewed through the questionnaires as they go out for their normal monitoring. The researcher gave the questionnaire to the Board of Directors and the staff to give their response. The purpose of these techniques was to allow discussion and probing to ascertain the micro-credits management at the bank.

Secondary  data  was  obtained  from  documentary  sources  such  as  books,  journals,  newspapers, reports, articles and other research related to this study. These sources were very useful in the literature review about micro-credits management. The literature reviewed served as both theoretical and empirical base for the analysis of the data collected.

3.2 Sample

Purposive sampling and accidental sampling techniques were used for this study. The purposive sampling allowed the picking of interview objects that fit the focus of the study (Osuala, 2001). Also, according to Kumekpor (1989) cited in Mensah (1997), with the purposive sampling, the sample units are selected not base on random procedure but intentionally selected for the study. This is based on the fact that they have certain characteristics that suit the study or because of certain qualities they possess, which are not randomly distributed in the universe but necessary for the study. The sample size was 220.

Table 4.11 Correlation matrix of Appraisal factors and policy factors and impact of the loans

	Pearson Correlation	Appraisal factors	Policy factors	Loan‘s boost of customer's activities
Appraisal factors	Correlation	1	.785**	-.322
	Sig. (2-tailed)	.001	.208	Sig. (2-tailed)
	N	17	14	17
Policy factors	Correlation	Correlation	Correlation	Correlation
	.785**	.785**	.785**	.785**
	1	1	1	1
Loan‘s boost of customer's activities	Correlation	Correlation	Correlation	Correlation
	-.322	-.322	-.322	-.322
	.149	.149	.149	.149

**. Correlation is significant at the 0.01 level (2-tailed).

Source: Field survey, 2015

Table 4.12 Mean and Standard Deviation of Appraisal factors and policy factors

Variables	Mean	Std. Deviation	Df	R	P
Appraisal factors	48.4706	10.79420	17	.785**	.001
Policy factors	29.5000	6.25033

Source: Field survey, 2015 Table 4.8 Assessments of the loan policies

The results points out that there is a statistically significant difference between appraisal factors and policy factors. It is observed that appraisal factors score of M=48.4706, SD=10.79420 was found to be significantly different from policy factors score of M=29.5000, SD=6.25033, df = 17, r value = .785/79, p value = p<.001. The p value falls within the accepted range of p<.05. This means the appraisal factors make a significant difference from policy factors. In other words, the respondents who had higher score on the appraisal factors also had higher score on the policy factors whilst those who had lower score on appraisal factors had lower score on the policy factors. This supports the assumption that the policy factors of the bank are in line with the appraisal factors.

Table 4.13 Mean and Standard Deviation of Appraisal factors and Loan’s boost of Customer’s activities

Variables	Mean	Std. Deviation	Df	R	P
Appraisal factors of the banks	48.4706	10.79420	14	-.322	.208
Loan‘s  boost of  customer's activities	1.0500	.22361

Source: Field survey, 2015

The results points out on the contrary that there is no significant difference between appraisal factors and loan‘s boost of customer's activities. It is observed that appraisal factors score M=48.4706, SD=10.79420 was not found to be significantly different from Loan‘s boost of customer's activities score M=1.0500, SD=.22361, df = 14, r value = -.322, p value = p<.208. The p value falls outside of the accepted range of p<.05. This means the appraisal factors makes no significant difference from the loan‘s boost of customer's activities. In other words, the appraisal activities did not have any influence on loan‘s boost of customer's activities. This does not support the notion that the bank‘s appraisal factors affect the loan‘s boost of customer's activities.

Table 4.14 Mean and Standard Deviation of policy factors and loan’s boost of customer's activities

Variables	Mean	Std. Deviation	Df	R	P
Policy factors	29.5000	6.25033	20	.149	.581
Loan‘s boost of customer's activities	1.0500	.22361

Source: Field survey, 2015

In the same token, the result points that there is no significant statistically difference between policy factors and loan‘s boost of customer's activities. It is observed that policy factors score of M=29.5000,  SD=1.0500  was  not  found  to  be  significantly  different  from  loan‘s  boost  of customer's activities score of M=1.0500, SD=.22361, df = 20, r value = .149, p value = p<.581. The p value falls outside the accepted range of p<.05. This means that the policy factors make no significant difference from loan‘s boost of customer's activities. The finding does not support the assumption that the policy factors of the bank are not in line with the loan‘s boost of customer's activities.

4 Findings and Recommendations

The following recommendations have been put across to make the research complete.

In rural areas where banks have high individual micro credit defaulting rate, group lending can improve repayment rate where the group is formed from areas with high degree of social connectedness. The most innovative lending methodologies that can be used by the bank are group lending, social intermediation and dynamic lending to joint-liable groups‘ these methodologies will solve the problem of inadequate appraisal, loan monitoring and high default rate. Group members have better access to information on reputation, creditworthiness of the group members and can put pressure on other members to repay the loans as the failure of any member to pay the loan will affect the whole group

The loan policy of the bank must be customer oriented. It must take into consideration the needs and the aspiration of the customers to come out with loan product that will be beneficial to the customer to enhance repayment.

To be able to solve the numerous problems of the bank, management must be proactive in credit delivery. Management must ensure that the bank work within advances to deposit ratio set by Bank of Ghana to be able to solve liquidity problems. The bank official must make sure that they get the necessary information about the loan customer before any credit is granted to the customers. In addition to physical asset as collateral the bank can adopt group lending where social collateral and trust are sufficient for economic active poor to repay the loan. Again, it is recommended  that  customer  receive  the  loan  as  and  when  needed  to  avoid  possible  loan diversion.  As  much  as  possible  the  bank  must  avoid  staff  and  board  influence  to  allow institutional procedures to work.

To be able to meet at least 80% loan repayment requirement by Bank of Ghana, every staff of the bank must be responsible for every loan. The responsibility of loan monitory and recovery should be every staff responsibility. The monitoring should be done on daily basis to improve on loan recovery.

Author: Stanley​ Gladstone

---

Bibliography 

Adams, D. W. and J. D. Von Pischke, (1992), Microenterprise credit programmes: déjà vu.: World Development, 20, 1463:70.

Ashun, F.E., (2010). Reducing Rural Poverty Through Microfinance Intervention: A Case Study Of Ahmad, S., M.S. Naveed and A. Ghafoor, (2004). Role of micro finance in alleviating rural poverty: A Case Study of Khushhali Bank Program in Rahim Yar Khan Pakistan. Int. J. Agric. Biol., 6: 426–428

Ajala, V. O. (1996), Scholarly Writing Guide For Researchers. Ibadan:  MayBest Publishers.

Ampah,S.K (2010), Rural Banks in Ghana Collapsing, Top Story www.theghanaianjournal.com 7th September, 2010

Asiedu – Mante, E (2011), Rural Banking in Ghana, Combert Impression, Accra

Balogun, E.D. and Alimi, A., (1988), “Loan Delinquency Among Small Farmers in Developing Countries: A Case Study of the Small – Farmer Credit Programme in Lagos State of Nigeria”, Lagos, Nigeria: CBN Economic and Financial Review

Bank of Ghana (2004), Quarterly economic bulletin, special issues.

Kerlinger, F. N. (1973), Foundations of Behavioural Research. New York: Holt, Rinehart and Winston Inc

Khandker, S. R. (1998), Fighting Poverty with Micro credit: Experience in Bangladesh”

Kumekpor, K. B. T. (2002), Research Methods and Techniques of Social Research, Sections 1-3, Accra, Ghana: Sonlife Press and Services

Mensah, I. (1997), Non-Governmental Organisations and Rural Development. The Case of World Vision International in the Western and Central Regions of Ghana”. Tromsø: University of Tromsø, Department of Planning and Community Studies. Unpublished Master‘s thesis

Osuala, E. C. (2001), Introduction to Research Methodology‖. Onitsha: AFRICANA-FEP Publishers Ltd (Africana Academic Books)

Owusu-Frimpong N., (2007), An evaluation of customers’ perception and usage of rural community banks (RCBs) in Ghana. London, UK: Department of Business and Services Sector Management, London Metropolitan University

Ghana Microfinance Institutions Network (GHAMFIN) (2003), Census of Micro Credit NGOs, Community-Based Organizations and Self Help Groups in Ghana,‖ Accra, GHAMFIN, draft report prepared by Asamoah & Williams Consulting.