A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T D I S C U S S I O N PA P E R 4 8 56591 RURAL BANKING: The Case of Rural and Community Banks in Ghana A JA I N A IR A N D AZEB FISSHA MAY 2010 A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T D I S C U S S I O N PA P E R 4 8 RURAL BANKING: The Case of Rural and Community Banks in Ghana A jai Nair and A z eb Fissha © 2010 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org/rural E-mail ard@worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Authors Ajai Nair: Program Coordinator, Agriculture and Rural Development Department, The World Bank, Washington DC; Azeb Fissha: Consultant, Agriculture and Rural Development Department, The World Bank, Washington DC. Cover photo: Eric Miller--World Bank Photo Library CONTENTS III Table of CONTENTS List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv List of Boxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter 2: Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Country Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Emergence and Evolution of Rural and Community Banks (RCBs) . . . . . . . . . . . . . . . . . . . . . . . 3 2.2.1 Rural Finance Prior to RCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2.2 1976­90: Establishment and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2.3 1991­2000: Restructuring and Capacity Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2.4 2001­08: Toward Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Review of Ghana's Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.4 The Legal, Regulatory, and Supervision Framework Governing RCBs . . . . . . . . . . . . . . . . . . . . . 6 2.4.1 Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4.2 The Apex Bank's Role in Supervision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 Rural Financial Services Project and Other Major Donor-funded Programs . . . . . . . . . . . . . . . . . . 8 2.5.1 The Rural Financial Services Project (RFSP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.5.2 Support Program for Enterprise Empowerment and Development (SPEED) . . . . . . . . . . . . . . 9 2.5.3 Ghana Rural Banks Computerization and Interconnectivity Project (GRBCIP) . . . . . . . . . . . . 10 2.5.4 Rural and Agricultural Finance Program (RAFiP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Chapter 3: Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1 Ownership and Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Staffing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.3 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.3.1 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.3.2 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.3.3 Money Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.3.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.3.5 Social Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.4 Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.4.1 Lending Technology and Credit-Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.4.2 Internal Controls or Operational Risk Management. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER IV C ONTENTS 3.5 Associative Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.5.1 The Association of Rural Banks (ARB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.5.2 The ARB Apex Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Chapter 4: Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1 Service Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1.1 Deposits and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1.2 Money Transfers and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2.1 Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2.2 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.3 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Chapter 5: Lessons, Key Issues, and Way Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.1 RCBs: Becoming Competitive, Retaining Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.2 The Apex Bank: Transforming into a Sustainable Service Provider . . . . . . . . . . . . . . . . . . . . . . 26 5.3 The BoG: Toward Effective Delegated Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5.4 The GoG: Incentivizing Service Delivery to the Poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Annex 1: Map of Ghana with RCB and Apex Bank Locations . . . . . . . . . . . . . . . . . . . . . . . 29 Annex 2: Sample Framework of 12 RCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Annex 3: Timeline of Events Relevant to RCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 LIST OF TABLES Table 4.1: Client Outreach by Different Financial Institutions, 2004­07 (in thousands) . . . . . . 21 LIST OF FIGURES Figure 2.1: Regional Distribution of RCBs, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 2.2: Regional Distribution of Population, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 3.1: Organizational Structure of a Rural and Community Bank . . . . . . . . . . . . . . . . . 12 Figure 3.2: Deposit Account Balances and Clients by Products, 2008 . . . . . . . . . . . . . . . . . 14 Figure 3.3: Loan Portfolio by Clients and Types of Products, 2008 . . . . . . . . . . . . . . . . . . . 15 Figure 3.4: Distribution of Loans across Major Sectors, 2008 . . . . . . . . . . . . . . . . . . . . . . 15 Figure 4.1: Outreach Overview of All RCBs, 2001­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 4.2: Real Deposits and Loans of All RCBs, 1999­2008 . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 4.3: Annual Growth of Real Deposits and Loans of All RCBs, 1999­2008 . . . . . . . . . . 23 Figure 4.4: PAR > 30 Days of All RCBs with Comparators . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 4.5: Real Net Worth, All RCBs, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 4.6: Real Annual Profits of All RCBs, 2000­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 RURA L B A NK ING CONTENTS V LIST OF BOXES Box 2.1: The Legal, Regulatory, and Tax Framework of Rural and Community Banks . . . . . . . . 6 Box 2.2: Schedule of Returns Filed by Rural Banks to the BoG . . . . . . . . . . . . . . . . . . . . . . . 7 Box 3.1: Susu Collector: Rural Banks' Frontline Deposit Mobilization . . . . . . . . . . . . . . . . . 13 Box 3.2: Major Rural Bank Credit Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Box 3.3: Credit Appraisal System in the Atwima Kwanwoma Rural Bank . . . . . . . . . . . . . . . 16 Box 3.4: Examples of Fraud Detected through Internal Controls . . . . . . . . . . . . . . . . . . . . 17 Box 4.1: Profiles of a Range of Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER ABB R E V I AT I O N S A ND ACRONYMS V II ABBREVIATIONS AND ACRONYMS ADB Agricultural Development Bank MCC Millennium Challenge Corporation AfDB African Development Bank MFI Microfinance institution ARB Association of Rural and Community Banks MFU Microfinance Unit BoG Bank of Ghana MICR Magnetic Ink Character Recognition BSD Banking Supervision Department MIX Microfinance Information Exchange CGAP Consultative Group to Assist the Poor MoFEP Ministry of Finance and Economic Planning CU Credit union MSI Microfinance Support Initiative E-FASS Electronic Financial Analysis and MTR Midterm review Surveillance System NBFI Nonbank financial institution FNGO Financial nongovernmental organization NGO Nongovernmental organization GCC Ghana Cooperative Council NPL Nonperforming loan GCSCA Ghana Cooperative Susu Collectors Association OSS Operating self-sufficiency GCUA Ghana Credit Union Association PAR Portfolio at risk GDP Gross domestic product RCB Rural and community bank GHAMFIN Ghana Microfinance Institutions Network RFID Rural Finance Inspection Department GLSS Ghana Living Standards Survey RFP Rural Finance Project GoG Government of Ghana RFSP Rural Financial Services Project GTZ German Technical Cooperation Agency S&Ls Savings and loans companies ICT Information and communication technology SME Small and medium-sized enterprise IFAD International Fund for Agricultural SPEED Support Program for Enterprise Development Empowerment Development MASLOC Microfinance and Small Loan Center WU Western Union AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER ACK N O W L E D G E ME NT S IX ACKNOWLEDGMENTS The authors would like to acknowledge the overall guidance for this study provided by Renate Kloeppinger-Todd, Rural Finance Adviser at the World Bank, and guidance and in-country support provided by Patience Mensah, formerly senior agricultural economist at the World Bank and task team leader for the Rural Financial Services Project, Ghana. Special thanks are ex- tended to the Director, Juergen Voegele and the Sector Manager, Mark E. Cackler of the Agriculture and Rural Development Department of the World Bank, for their support. The authors also wish to thank several organizations and individuals who made their time available for interviews and shared data, particularly Dela Selormey, director of the Banking Supervision Department, Bank of Ghana; Kobina Amoah, head of the Microfinance Unit, Ministry of Finance; Duke Osam-Duodu, deputy managing director, and his colleagues at the ARB Apex Bank; Emmanuel K. Kwapong, formerly managing director of the ARB Apex Bank; officeholders of the Ashanti regional chapter of the Association of Rural Banks; and the managers, staff, and clients of the 12 rural banks we visited. The authors would also like to extend special thanks to Mr. Samuel Twumasi Ankrha, Mr. Richard Mette Addo, and Ms. Halima at the ARB Apex Bank for providing support during the field visits. Finally, the authors wish to thank the peer reviewers, Emannuel Asiedu-Mante, Henry K. Bagazonzya, and William F. Steel, for their insightful comments and advice. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER EX E C U T I V E S U MMARY XI EXECUTIVE SUMMARY This case study describes the history and business model of the rural and community bank (RCB) network in Ghana, analyzes its performance, identifies key issues, and makes recommendations on the way forward. The study analyzes the service de- livery and financial performance of the RCBs at two levels: the network of all banks and a representative sample of 12 RCBs. It finds that although the service delivery performance of the RCB network has been very good, its financial performance has been mixed. Before the establishment of RCBs in the late 1970s and the subsequent expansion of other service providers into rural areas, access to institutional credit for farm and nonfarm activities was scarce. The main sources of credit were moneylenders and traders that charged very high interest rates. In many rural communities, secure, safe, and convenient savings and payment facilities hardly existed. Many rural dwellers had to travel long distances to receive payments (such as salary and pension deposits), transfer funds, and cash check payments for their agricultural produce. This situation led the Government of Ghana (GoG) to take several measures to increase access to credit in rural areas. After establishing an agricultural lending requirement for commercial banks and creating a publicly owned agricultural development bank, the GoG facilitated the establishment of RCBs. The first RCB was established in a farming community in the central region of Ghana in 1976. Rural communities showed tremendous interested in the community ownership and management features of RCBs, and by 1984 the number of RCBs reached 106. The introduction of a check payment system for cocoa farmers (known as the Akuafo Check operation) also spurred the establishment of local banks in many communities. In 1981 about 30 existing RCBs formed an Association of Rural Banks (ARB) to serve as a networking forum. As a network of institutions sharing a common mission, the ARB promoted and represented the RCBs and also provided training services to member RCBs.2 The financial performance of many RCBs started to decline, however, for several reasons, including a drought that affected the country in 1983 (leading to high loan default rates), weak governing ability, conflicts within boards of directors, and inef- fective management in many RCBs. Several reforms were undertaken to curb the deteriorating situation--exposure to risky sectors (mainly agriculture) was limited, distressed banks were closed, supervision by the central bank was strengthened, and RCB managers and boards of directors were offered training. Nevertheless, RCBs continued to be relevant rural finance service providers, and the GoG has consistently provided support to the RCBs by financing capacity building (in partnership with several donors), restructuring programs, and undertaking regulatory reforms. By the end of 2008, 127 RCBs were in operation with a total 584 service outlets. RCBs are regulated by Ghana's central bank, the Bank of Ghana, and thereby form part of the country's regulated financial sector. RCBs are the largest providers of formal financial services in rural areas and represent about half of the total banking outlets in Ghana (IFAD 2008). BUSINESS MODEL Small asset base. RCBs are relatively small financial institutions with average share capital of GHc 136,526 (US$105,263), average deposits of GHc 2.3 million (US$1.77 million), and average assets of GHc 3.8 million (US$2.4 million). Values of the three indicators, however, vary significantly among RCBs. Out of the total 127 RCBs, 75 percent have assets between GHc 1 million (US$771,010) and GHc 8 million (US$6.1 million), and 20 percent of RCBs have assets of less than GHc 1 million, and 5 percent of RCBs have assets exceeding GHc10 million (US$7.7 million). Similarly, 44 percent of RCBs have share capital of less than GHc 100,000 (US$77,101) and only 6 percent have share capital of more than GHc 250,000 (US$192,753). AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER XI I EX EC UTIV E S UM M A RY Fully owned and governed by local communities. RCBs are fully owned by individual shareholders who are residents of communities in which they operate. Each rural or community bank has a board of directors (BoD) that is responsible for its strategic governance. BoDs are elected by owners/shareholders during annual general meetings. Election criteria are normally based on reputation in the community and professional expertise. Most board members have relevant professional experience, but experience in banking is nevertheless extremely limited. Board members can be reelected more than once. In some of the old RCBs, board members have served as long as 32 years. The average length of service in the sample banks was 11 years. Key responsibilities of BoDs include (1) appraising and approving loan applications as well as ensuring repayment of loans; (2) monitoring the financial performance of the bank; (3) providing strategic guidance to management; and (4) supervising the management. Professionally managed and staffed. The core management staff of a typical RCB is typically composed of a chief executive officer who is in charge of the daily management of the bank; an internal auditor, responsible for internal control measures, who reports to the BoDs3; a finance officer; and credit and project officers (in charge of microfinance operations). Many of the personnel are recruited from local communities. Almost all RCBs have one or more branches, each of which is staffed with a branch manager, an accountant, credit officers, clerks, and cashiers. Strategic alliance to stay competitive. The ARB Apex Bank was granted a banking license in 2001 and commenced commer- cial operations in 2002 with significant financial support from the Rural Financial Service Project, which was funded by the World Bank, the International Fund for Agricultural Development, and the African Development Bank. The Apex Bank provides specialized services essential to improving the quality and scope of products offered by RCBs and also performs important supervisory functions delegated by the BoG. Check clearing, specie supply, treasury management, loan fund mobilization, domestic and international money transfers, information and communication technology, training, and inspection and audit are among the main services offered by the Apex Bank. The Apex Bank provides most of the services on a fee basis. PRODUCTS AND SERVICES Savings. RCB savings products include regular savings accounts, current accounts, susu deposits,4 and fixed or time de- posits. In the sample of 12 RCBs, regular savings deposits account for about 58 percent of the total number of clients and 57 percent of the total deposit balance. These accounts are small in size and short term. The interest rate for regular savings is low and is paid only once a balance reaches a certain amount (usually higher than the balances held by most savers). Many rural clients have access to this type of account; unlike other commercial banks, RCBs do not require a high balance to open an account. Susu is the second-largest account type, representing 21 percent of total clients, but its share of total deposits is only 11 percent because of the small size of each account. Fixed and special deposits that offer higher interest rates with a long-term deposit contract represent only about 1 percent of total number of clients. Credit. The credit products offered by RCBs include microfinance loans, personal loans, salary loans, susu loans, and over- draft facilities. In the sample of 12 RCBs, salary loans account for 33 percent of total advances, followed by personal loans (24 percent) and microfinance (20 percent). In terms of the number of borrowers, microfinance accounts for 31 percent of total borrowers followed by personal loans (26 percent) and salary loans (22 percent). RCB loans are used for agriculture, cottage industries, and trading. Microfinance loans are categorized under trading, which accounts for 41 percent of the total sectors financed. Agricultural loans are reported to account for about 9 percent of loans, but this figure is an underestimate given that a significant portion of the loans reported as microfinance and personal loans are actually used for agricultural production. Money transfer and payments. RCBs offer money transfer and payment services to their clients in collaboration with the ARB Apex Bank. RCBs participate in local and international money transfers through, among others, Western Union, Money Gram, and Vigo. Government agencies use the RCB service outlets for salary and pension deposits. Clearing of checks for cocoa purchases is also an important service provided under the payment category. RURA L B A NK ING EX E C U T I V E S U MMARY X III PERFORMANCE Steadily increasing outreach and service delivery. The RCB network reaches about 2.8 million depositors and 680,000 bor- rowers, making RCBs the largest group of licensed financial service providers in rural areas. RCBs have a market share of 67 percent of depositors and 48 percent of borrowers in rural areas. Clients of RCBs consist mostly of farmers, government employees, and small and micro entrepreneurs. RCBs' increasing outreach to underserved areas has significantly contributed to addressing the credit constraint in rural areas. Between 2000 and 2008, the number of depositors grew at an average annual rate of 14 percent, and the number of borrowers grew at an average annual rate of 27 percent. Mixed financial performance. The profitability and net worth of the RCB network have steadily increased from 2000 to 2008. Networkwide capital is well above the minimum 10 percent required by the Bank of Ghana. Not all RCBs in the network are solvent, however; in 2008 seven RCBs were insolvent, and the continued operation of poorly performing RCBs is one of the key issues facing the network. The relatively high ratio of nonperforming loans is a major factor affecting financial performance. In the sample RCBs, the proportion of the loan portfolio that was in default for more than 30 days was 16 percent, compared with 3 percent for their global peer group, according to data reported in the Microbanking Bulletin. Similarly, in the RCBs, loans in default for more than a year were 3.5 percent, compared with 1.5 percent in the peer group. This indicator is a good proxy for loan losses because most loans that have been in default for more than a year are generally not paid back at all. LESSONS AND THE WAY FORWARD The case of rural banking in Ghana points to the following lessons: Rural communities have the capacity to create and manage their own financial institutions. In Ghana, rural communi- ties created hundreds of such institutions with very little direct financial support from the government. A financial operation that aims to be profitable requires a varied ownership structure, which is lacking in the rural banking system in Ghana. The growth of the network is constrained by the RCBs' location-specific ownership structure, which limits the ability of the institutions' managers and owners to propose mergers and acquisitions to stay profitable and efficient. The initial poor performance of RCBs stems from both an unfavorable operating environment and capacity constraints. Factors causing poor operating environments include an absence of clear prudential regulations, both financial and nonfinancial, and excessive directed lending requirements, which limit flexibility in managing risk exposure. Although capacity constraints in rural areas limit the scope of operation of local financial institutions to some extent, targeted investments in building the capacity of service providers can have positive payoffs. This finding suggests that initiatives to build local financial institutions should have significant capacity-building components. Small local financial institutions often cannot easily procure inputs such as training and specialized technical assistance for product development and setting up of operational systems from the market to be able to produce viable outputs (in terms of service and products) either because the supply of such specialized inputs is constrained or because the institutions do not have the scale to obtain these services individually at a minimum cost. Hence, initiatives to build local financial institutions will also have to support the creation of strategic alliances such as the Apex Bank that can either provide such services or facilitate their cost-effective provision. The creation of the Apex Bank also shows the challenges that such an institution faces in ensuring financial sustain- ability while providing low-cost services. Realistic measures to ensure sustainability should be identified and clarified at the earliest stages to help formulate the business and revenue model for the apex institution. Even when a good legal, policy, and regulatory environment is provided, a certain number of institutions will fail. This issue should be addressed upfront by committing the necessary capacity in terms of skills, political autonomy, and financial resources to ensure effective regulation and supervision. Donor funding for supervisory activities cannot sustain a supervisory regime in the long run, and mobilization of private funding to supervise services delivered to poor clients is not a feasible option. Government resources are thus funda- mental to ensure adequate supervision of services delivered to poor clients, and donor funding should complement direct government resources allocated for supervision. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER XI V EX EC UTIV E S UM M A RY Finally, the length, breadth, and scope of the Ghanaian experience offer the potential for carrying out a rigorous impact assessment of rural finance and a cost-benefit analysis of public investment in rural finance. Such a study is beyond the scope of this paper, but the RCB experience offers fertile ground for this research. In going forward, the study highlights the following issues and recommendations: RCBs. The challenge for the RCBs is to become more competitive while retaining their mission of providing services to clients in rural areas. Many financial institutions are expanding into the rural financial market in major ways, often target- ing clients of the rural banks and their personnel. In this situation, the RCBs should not try to seek protection against this competition. Rather, these competitive market conditions should stimulate the RCBs to innovate and become more efficient in an attempt to strengthen their position in the financial market. Some banks, motivated by their competitors, have undertaken measures to improve their competitiveness and improve their performance. At the network level, the ARB Apex Bank should proactively seek sustainable solutions for weak RCBs with very small capital and deposit bases. Some may have to be merged with another willing RCB or forced into liquidation. Apex Bank. The Apex Bank was created primarily as a service provider to the RCBs, but it faces challenges in becoming financially self-sufficient and sustainable. It is considering options for generating additional revenue, such as becoming a full-service commercial bank or opening a new banking branch. Such changes should not, however, come at the expense of the mission of the RCB network, which is to increase provision of services in rural areas in a sustainable manner. The Apex Bank could raise revenues by providing additional services currently needed by RCBs, which are willing to pay for these services. BoG. The Bank of Ghana has delegated some supervisory functions to the Apex Bank, consistent with international good practice. Direct supervision of relatively small institutions, such as RCBs, is not a feasible and financially sus- tainable option for central banks. The arrangement is weak, however, because of resource, capacity, and structural constraints. The BoG, along with the GoG, needs to immediately address these issues to ensure RCBs' adherence to regulatory standards and thereby protect consumers. GoG. The Government of Ghana has played a remarkable role in facilitating the creation and growth of the RCB network. In contrast to most countries--where excess regulation and political interference virtually destroyed rural financial institutions, whether development banks or financial cooperatives--Ghana successfully changed many of the regulations that constrained the growth of the RCB network. Some gaps, however, remain unfilled. The GoG should ensure that adequate resources are available for supervising RCBs and compensating them when they are called upon to deliver public programs. It should also consider additional measures to protect consumers, such as deposit insurance and financial literacy programs. RURA L B A NK ING C H A P T E R 1 -- I N T RODUCT ION 1 Chapter 1: INTRODUCTION Rural and community banks (henceforth referred to as rural broader private sector. Some rural banks have figured more banks or RCBs) are a network of 127 independent unit banks than once in Club 100, a group of 100 Ghanaian institutions in Ghana. They are regulated by the Bank of Ghana and there- recognized annually for business excellence. by form part of the regulated financial sector in Ghana. These banks are the largest providers of formal financial services Several challenges, however, remain. The Bank of Ghana in rural areas and also represent about half of the total bank- (BoG) rated the performance of 17 of the 127 rural banks ing outlets in Ghana (IFAD 2008). By the end of 2008, these in operation as mediocre, based on capital adequacy, and it banks together had 421 branches. Including head offices, categorized 5 banks as distressed.6 Among the banks whose there were 548 service delivery locations spread through- performance is categorized as mediocre, 6 rural banks have out the country. All administrative regions have at least one negative net worth. The apex bank of the network, which was bank, although most are located in the Ashanti, Western, created primarily to provide services to rural banks, is not yet Eastern, and Central regions (see Annex 1 for map of rural fully financially self-sufficient and has inadequate resources to bank locations).5 effectively perform its functions. The BoG, which is primarily responsible for supervising RCBs, is constrained in effectively RCBs are relatively small financial institutions with aver- performing its supervision role because of political and civil age share capital of GHc 136,526 (US$105,263), average society pressures, resource constraints, and limited delega- deposits of GHc 2.3 million (US$1.77 million), and average tion of supervisory functions to the Apex Bank. assets of GHc 3.8 million (US$2.4 million). Values of the three indicators, however, vary significantly. Out of the 127 RCBs, This paper is based on a review of various published and 75 percent have assets between GHc 1 million (US$771,010) unpublished documents, interviews with key respondents, and GHc 8 million (US$6.1 million), 20 percent have assets of and an analysis of data collected from the BoG, the ARB less than GHc 1 million, and 5 percent have assets over GHc Apex Bank, and a sample of rural banks. The sample rural 10 million (US$7.7 million). Similarly, 44 percent of RCBs banks were selected primarily to reflect the proportional rep- have share capital of less than GHc 100,000 (US$77,101) and resentation of different categories of rural banks according to only 6 percent have share capital of more than GHc 250,000 the BoG's performance classification of all 127 banks. Other (US$192,753). factors used to select the sample of banks were location (primarily rural or periurban, and agroclimatic zone), size, and As a network, RCBs have achieved a remarkable level of ser- age. Annex 2 lists the banks included in the sample. Not all vice delivery and financial performance. At the end of 2008, data, however, were available for all the banks included in the they had deposits of GHc 343.9 million (US$265.1 million) sample. In the sample used for a specific analysis, the per- from more than 2.8 million clients, and loans and advances formance category of banks with missing data is mentioned of GHc 224.7 million (US$173.2 million) with about 680,000 wherever the results are used. clients. They delivered 128,875 domestic money transfers worth around GHc 63.3 million (US$48.8 million) in 2007 The performance analysis of the rural banks is primarily pre- and 32,392 international money transfers worth GHc 9.3 sented at the network level (consolidated data for all RCBs) million (US$7.1 million) in 2008. They also facilitated check using secondary data available from the ARB Apex Bank, the transactions worth GHc 993.7 million (US$766.1 million) in BoG, and other secondary sources. Whenever the neces- 2008. RCBs made a consolidated profit of GHc 15.6 million sary data are not available at the network level, data from (US$12.0 million) in 2008 and had a consolidated net worth the sample banks are used, if available. The analysis includes of GHc 62.3 million (US$48.03 million). Several have excelled trends, frequencies, and composition of key indicators and in performance, both within the financial sector and in the their comparison with data from peer-group institutions. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 2 CH A PTER 1 -- INTR OD UC TION This paper is organized as follows: Section 2 describes the and services, systems, and associative structures. Section background of RCBs, including the sociopolitical context, 4 analyzes the service delivery and financial performance a narrative on the emergence and evolution of RCBs, the of RCBs. Section 5 identifies some key issues and discuss- structure of the Ghanaian rural financial market, the legal es options for the way forward. Finally, Section 6 draws and regulatory environment, and an overview of major do- some lessons from the RCB experience and discusses its nor programs. Section 3 describes the business model of relevance to other countries considering replicating the RCBs, including ownership, governance, staffing, products Ghanaian rural banking system. RURA L B A NK ING C H A P T E R 2 -- B A C KGROUND 3 Chapter 2: BACKGROUND 2.1 COUNTRY CONTEXT 2.2 EMERGENCE AND EVOLUTION OF RURAL AND COMMUNITY BANKS (RCBs) Ghana covers about 240,000 square kilometers of land in three major ecological zones including the rainforest zone 2.2.1 Rural Finance Prior to RCBs (25 percent of total area), the transitional zone (11 percent), and the savannah zone (64 percent).7 In 2007 Ghana's popu- Before the establishment of the first rural bank in 1976, the lation was 23.5 million, growing at an estimated 2 percent availability of formal credit in rural communities predominant- a year, down from the 3.4 percent growth recorded in the ly made up of small farmers and fishermen was extremely mid-1990s. Urbanization is concentrated mainly in the south- limited. The main sources of credit were moneylenders and ern and central regions, which contain nearly 49 percent of traders charging exorbitant interest rates. The Government of the country's population. Although there are densely settled Ghana had taken some policy measures to improve access pockets in the Upper East and Volta regions, more than half to finance in rural areas. These measures included a require- of the population lives in the Greater Accra, Eastern, Central, ment that commercial banks lend at least 20 percent of their and Ashanti regions. portfolio for agricultural uses and the establishment of the Agricultural Development Bank (ADB) in 1965 with an exclu- Real gross domestic product (GDP) growth rose gradually sive mandate of lending for agriculture and allied industries from 4.5 percent in 2002 to an estimated 7.2 percent in in rural Ghana. Subsequently, commercial banks and the 2008, although it is still below the rate needed to achieve ADB opened branches in rural areas, with an emphasis on Ghana's ambition of becoming a middle-income country cocoa-growing rural areas. Nevertheless, lending to the ru- by 2015. Inflation fell from 42 percent in 2001 to 13 per- ral sector remained low; the commercial banks used their cent in 2008. Agriculture contributes 40 percent of GDP; rural branches primarily to make payments to cocoa farm- industry, 27 percent; and services, 32 percent. Agriculture ers and collect deposits for lending in urban areas. Other also contributes about three-quarters of export earnings banking services, like credit, were not provided as initially and provides the main source of livelihood for about envisioned. Commercial banks demanded higher deposit 60 percent of the population. Cocoa accounts for about accounts and stronger collateral requirements to provide 16 percent of agricultural GDP; cereals and root crops, loans to rural areas. Many small farmers and fishermen did 65 percent; and forestry, livestock, and fisheries, the re- not have deposit accounts in commercial banks, and the col- maining 19 percent. lateral they had available was not satisfactory for commercial lending (Andah and Steel 2003). Mensah (1993) and Ranade Agricultural growth, which averaged 3.6 percent for the (1994) found that the ADB's credit provision and coverage 10-year period from 1997 to 2007, remains the mainstay were limited. Only 27 percent of its branches were in rural ar- of strong overall growth performance, accounting for more eas, and lending to smallholder farmers made up only about than half of total growth in this period. The country has an 15 percent of its total portfolio. agricultural system that is traditional, rainfed, and dominated by smallholders. Some 2.7 million farms, averaging 1.2 hect- In view of this situation, the Government of Ghana (GoG) con- ares in size, account for 80 percent of agricultural production. sidered supporting the establishment of community banks in The 2006 Ghana Living Standards Survey (GLSS) estimates rural areas that would be dedicated to providing financial ser- that the poverty headcount fell from 39.5 percent in 1998 to vices in those areas. It asked the BoG to send a delegation to 28.5 percent in 2006. the Philippines to study the rural banking system there and AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 4 CH A PTER 2 -- B A C K GR OUND afterward decided to facilitate the opening of banks in rural deterioration. First, the boards of directors of most banks had farming and fishing communities. little experience in or understanding of the banking business. Criteria for selecting directors did not include an individual's 2.2.2 1976­90: Establishment and Growth competence to lead a banking institution. The main crite- The first rural bank was established in 1976 in the Central rion was popularity in the community. Second, because the region of Ghana with paid-up capital of 60,660 old Ghana banks were located in rural areas and had limited resources, cedis (old GHc 60,660, or about US$52,000). It was estab- they could not attract well-qualified and experienced person- lished in Nyakrom, a farming community. Capital contribu- nel. Employees of the banks were in most cases selected tions were mainly drawn from farmers in the community. from their own communities, regardless of qualifications and A second bank was opened in the following year at Biriwa, experience. Training opportunities were rarely available. Third, a fishing village also in the Central region. By 1980 the weak internal controls led to several instances of corruption number of rural banks had reached 20. Managers and direc- by management and staff. Fourth, the sector-specific credit tors of these rural banks founded the Association of Rural quotas and other inappropriate regulatory requirements Banks (ARB) to promote the exchange of information and (concessional interest rates for priority sectors including ag- to improve the performance of rural banks as a whole. Over riculture) constrained the RCBs' ability to flexibly respond to the period 1980­84 the number of rural banks rose rapidly market signals and risks unique to RCBs. Specifically, RCBs and reached 106. This growth was driven by rising interest gave many bad loans to meet the 50 percent lending require- among rural communities in establishing their own banks ment for agriculture imposed by the BoG. Fifth, inadequate and by the introduction of Akuafo Check operations8 in resources limited the BoG's capacity to supervise the rapidly cocoa-growing areas in 1982. rising number of rural banks and to effectively respond to their complex difficulties. As the network of rural banks grew, it was essential to provide a code for establishing new rural banks. The BoG developed In an attempt to respond to the worsening financial perfor- and issued guidelines for the establishment of rural banks in mance of RCBs, the BoG introduced some financial reforms. 1985. The minimum paid-up capital required by BoG was old These reforms included a review of the sector-specific credit GHc 1.5 million. Of this, shareholders were to hold 67 per- quotas9 and a reduction in agricultural loans, increases in cent, and 43 percent was to be contributed by the BoG. The primary and secondary reserve requirements, closure of dis- maximum share that could be purchased by an individual tressed banks, and a stronger role for the BoG in examination shareholder was limited to old GHc 10,000. This limit was and control of the banks (Andah and Steel 2003). The World intended to allow equal participation of all shareholders from Bank­supported Rural Finance Project, approved in 1989, fur- the community and to mitigate the risk that a few sharehold- ther advanced this attempt. The project aimed to strengthen ers would dominate the governance of the banks. the rural finance sector, particularly the RCBs, by (1) provid- ing technical assistance for restructuring about 80 RCBs; (2) The rural banks provided mainly savings and credit services strengthening the ARB and credit unions; (3) rationalizing the and products. With the increase in the number of rural banks, roles of the Rural Banking Department of the BoG and the the number of individuals with bank accounts also increased. ARB; (4) improving the rural credit appraisal capacity of RCBs Salary and pension deposits for civil servants were transferred and participating financial institutions; and (5) strengthening using rural bank networks. The volume of deposits increased the BoG's capacity to supervise rural banks.10 from old GHc 148,000 in 1976 to old GHc 2.3 billion in 1988. With the addition of credit lines, the consolidated loan portfo- 2.2.3 1991­2000: Restructuring and Capacity Building lio grew to around US$4 million, with nearly half of the port- The Rural Finance Project (RFP) started in 1989 and ended folio in agriculture and 30 percent in cottage industries. The in 1994. Initial diagnostics showed that 98 out of 122 banks repayment performance of loans worsened, however, with were capital deficient. In 1992, when the BoG began rating nonperforming loans (NPLs) rising from 5 percent in 1982 to RCBs, 23 out of 123 banks were categorized as satisfac- 70 percent in 1986. The capital available in most banks was tory, and even this number was considered an overestimate. not sufficient to cover the cost of the bad loans. The project offered assistance to rural banks in conducting Although the 1983 drought and the 1984 bumper yield comprehensive special audits and preparing restructur- and price slump contributed to the worsening loan portfo- ing programs on the basis of the audit recommendations. lio performance, several other factors also figured in this Nonperforming loans were assigned to a special collection RURA L B A NK ING C H A P T E R 2 -- B A C KGROUND 5 unit with collection targets, and provisions were made for comprehensive attempt to strengthen the rural financial sector. bad debt. A recapitalization fund equivalent to the value of This project will be discussed in Section 2.5. the nonperforming loans was set up to supplement the loan collection effort. Besides the restructuring program, the proj- 2.2.4 2001­08: Toward Consolidation ect provided capacity-building support to enhance the rural The RFSP became effective in 2001, and the ARB Apex banks' credit administration systems, which had been one of Bank created by the rural banks commenced business in the causes of the large nonperforming portfolio. 2002 with financial support provided under the RFSP. The The restructuring activities were also accompanied by ad- establishment of an apex structure for the rural banking sys- ditional regulatory reforms. The absolute ceiling on share- tem was intended to leverage economies of scale to address holding limits by individuals and companies was eliminated constraints faced by the rural banks in check clearing, specie and replaced with limits on the percentage of shareholding: supply, liquidity management, and training. individuals were limited to holding 5 percent of total capital Several key regulatory changes were also undertaken during and companies were limited to holding 10 percent. Sector- this period. The secondary liquidity reserve requirement was specific allocation of credit was removed for sectors other reduced from 52 to 30 percent in 2006.12 The capital adequa- than agriculture, and the allocation for agriculture was re- cy ratio was increased from 6 to 10 percent, and the paid-up duced from 50 percent to 20 percent. Concessional interest capital requirement for establishing a rural bank was raised rates for high-priority sectors11 were also removed. to GHc 150,000 (US$116,135). The BoG delegated part of its The RFP resulted in some positive outcomes. The number supervisory functions to the ARB Apex Bank and launched an of RCBs rated as satisfactory increased to 55 (out of 125); electronic reporting system to ensure efficient supervision. deposits increased from old GHc 4.6 billion in 1989 to old GHc Moreover, some rural banks adopted a more commercial 13.2 billion by 1994; and loans nearly doubled from old GHc 3.7 business model and introduced innovative products such as billion in 1991 to old GHc 6.8 billion in 1994. The recovery rate microfinance saving and lending techniques (Andah and Steel of the RCB loan portfolio improved to 60 percent. Most RCBs, 2003). Many RCBs started to use new techniques--namely, however, continued to be financially and operationally weak. group savings with credit, group and individual savings with Of the 134 rural banks in existence at the end of 1998, 23 were credit, individual savings with group credit, and individual sav- classified as distressed and subsequently closed by the BoG. ings with credit (Andah and Steel 2003). Fifty-six of the remaining 111 RCBs were rated as mediocre As of 2008, there were 127 RCBs in existence. Of these, (defined as rural banks with capital adequacy between 1 and 6 one was in the process of being liquidated and six were percent), and only 55 were rated as satisfactory. categorized as distressed. As shown in Figures 2.1 and 2.2, At the end of the 1990s, two major policy decisions were as of 2008 just over three-quarters of the RCBs are distrib- made to strengthen supervision of the RCBs: one was to uted in five regions of Ghana, which together were home to support the establishment of an apex bank, which would 57 percent of the Ghanaian population in 2000. The northern provide support services to the RCBs, and the second was part of the country, which includes the Northern, Upper East, to merge the Rural Finance and Inspection Department in and Upper West regions, has 11 percent of the RCBs but the BoG with the Banking Supervision Department (BSD). 18 percent of the country's population. The merger, accomplished in 1999, was intended to integrate FIGURE 2.1: Regional Distribution of RCBs, 2008 supervision of the RCBs with that of other institutions over which the BoG had supervisory responsibility. 5% Ashanti 3% 3% 17% 5% Central The GoG decided to borrow again from the World Bank and oth- Eastern er donors to help establish the Apex Bank and for other activi- 9% Brong Ahafo 17% Western ties to strengthen the rural financial sector. The Rural Financial Volta Services Project (RFSP), cofinanced by the World Bank, the Greater Accra International Fund for Agricultural Development (IFAD), and 10% Upper East the African Development Bank (AfDB), was approved by the Upper West respective boards in 2000. In contrast to the previous piecemeal 16% 17% Northern attempts by these donors, this project coordinated donors in a Source: ARB Apex Bank 2008. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 6 CH A PTER 2 -- B A C K GR OUND FIGURE 2.2: Regional Distribution of Population, 2000 BOX 2.1: The Legal, Regulatory, and Tax Framework Ashanti of Rural and Community Banks 10% 17% 3% Central 5% Eastern Licensing requirements 9% Brong Ahafo · Minimum paid-up capital of GHc 150,000 Western · Ownership of shares by residents Volta 16% · Operation within a radius of about 25 miles Greater Accra 11% Prudential requirements Upper East Upper West · Minimum paid-up capital of GHc 150,000 9% 10% 10% Northern · Capital adequacy ratio of 10 percent Source: ARB Apex Bank 2008. · Liquidity reserve ratio of 43 percent · Exposure limits of 25 percent for secured loans, 10 percent for unsecured loans, and 2 percent 2.3 REVIEW OF GHANA'S FINANCIAL SECTOR for loans to members of board of directors Ghana's financial sector is composed of banks and nonbank Tax requirements financial institutions (NBFIs). The country has about 23 major · Corporate income tax rate of 8 percent banks--including 3 development banks, 4 commercial banks, · Value-added tax of 15 percent and 16 universal banks--representing about 90 percent of the · National Health Insurance Scheme tax of 2.5 total assets of the banking and nonbanking sector. The NBFI percent subsector includes 36 institutions accounting for 5 percent of the total assets of the financial sector. The NBFIs include 17 Source: BoG and ARB Apex Bank. savings companies, 13 saving and loans companies, 4 leasing companies, 1 discount house, and 1 mortgage company. Many of these institutions provide services in urban and periurban areas. Their service outlets are largely concentrated around the as limited liability companies14 and licensed by the BoG within major urban centers of the Greater Accra, Ashanti, and Eastern the framework of the Banking Act. regions, with little outreach to rural and remote areas. In 2008 there were 127 rural banks licensed and supervised In addition to formal financial institutions, informal and semi- by BoG. The statutory role of the BoG in the operation of formal institutions--including 380 credit unions, 80 financial rural banks includes the licensing of new banks, supervision, nongovernmental organizations, and 4,000 susu collectors and liquidation. The regulatory framework for rural banks at (individuals)--are important financial service providers in the end of 2008 is presented in Box 2.1. The capital require- Ghana. RCBs and their agencies represent about 5 percent of ments for all financial institutions in Ghana were increased the total banking assets and account for about half of the total in 2007. The other local commercial banks were given until banking outlets in the country, and they are especially signifi- 2012 and foreign-owned ones until 2009 to meet the new cant in rural areas. Formal financial service providers such as minimum level of capital (GHc 60 million, or US$46.4 million), commercial banks represent about 40 percent of the money but RCBs have not been given a specific date to achieve the supply in the overall financial sector. The remaining amount minimum capital level of GHc 150,000 (US$116,135). RCBs is believed to be outside the formal system (IFAD 2008) and whose capital falls below the stipulated minimum of GHc mainly in rural areas. Thus, institutions such as RCBs and infor- 150,000 will not, however, be allowed to pay dividends or mal and semiformal service providers play an important role in open new branches or agencies until they attain the mini- addressing the lack of access in these areas. mum level of capitalization. RCBs must maintain primary and secondary liquidity reserve 2.4 THE LEGAL, REGULATORY, AND SUPERVISION requirements to mitigate liquidity risk. As a primary liquid- FRAMEWORK ity reserve ratio, rural banks are required to maintain 8 per- GOVERNING RCBs cent of their deposits with the BoG and 5 percent of their Under the Banking Act, the BoG has overall regulatory and deposits with the ARB Apex Bank. As a secondary liquidity supervisory authority in all matters related to banking institu- reserve, rural banks are required to maintain 30 percent of tions in Ghana.13 Rural and community banks are incorporated their deposits as liquid investments such as BoG bonds, ARB RURA L B A NK ING C H A P T E R 2 -- B A C KGROUND 7 certificates of deposits, and Treasury bills. Treasury bills are The BoG is expected to conduct an on-site examination of purchased through the ARB Apex Bank. RCBs that are fully rural banks at least once a year. Annual on-site supervision computerized and have achieved the full capital adequacy re- takes about five days in each rural bank. The on-site supervi- quirements can be exempted from maintaining the second- sion reviews various aspects of a bank's operations, including ary liquidity reserves. books, records, and use of fixed assets. During these visits, BoG supervisors also check physical cash, inspect the cash New rural banks have a 10-year tax holiday. During this pe- storage security system, verify compliance with the liquidity riod, however, they are not allowed to pay dividends and are reserve ratio, check insurance policies, and examine customer expected to use the tax savings to strengthen their capital turnaround time. The examination is carried out without prior position. notice to the rural banks. In the course of the examination, inspectors may also interview staff, clients, and directors as 2.4.1 Supervision necessary. The output of the examination is a report followed by a directive outlining actions that the bank must implement. The BoG supervises rural banks through its Banking Supervision Department (BSD). The BSD supervises opera- Based on the annual returns filed by rural banks and on-site tions of rural banks through on-site and off-site inspection, inspections, BoG categorizes rural banks as satisfactory or issuance of administrative directives, and attendance of rural mediocre. The key performance indicators used to arrive at bank annual general meetings. Rural banks are required to this classification are paid-up capital, net worth, the capital submit monthly, quarterly, and annual returns on a variety of adequacy ratio, loans and advances, investments, liquidity, de- financial and nonfinancial indicators (Box 2.2 shows the key posits, and total assets. The BoG can revoke the license given returns filed by rural banks). The BoG can penalize rural banks to a rural bank if the capital base of the bank is significantly for nonsubmission, incomplete submission, delayed submis- eroded and liabilities exceed assets--unless the shareholders sion, or inaccurate submission of any of these returns. are able to inject additional capital to restore the bank to nor- mal operation within six months of the capital erosion. BOX 2.2: Schedule of Returns Filed by Rural Banks to Effective supervision of rural banks by the BoG is made dif- the BoG ficult by the large number of rural banks spread over a large geographical area. Because of manpower constraints, the Weekly BoG has been unable to conduct regular on-site examinations · Liquidity reserve of all rural banks annually. As a result, some poorly perform- ing banks that need these on-site examinations the most do Monthly not receive them. Until recently, RCBs were required only to · Statement of assets and liabilities submit paper-based returns, and this situation often meant · Profit and loss accounts poor data quality because of missing data or data errors. · Large exposures (advances and deposits) To improve the quality of supervision and monitoring, the · Capital adequacy ratio BoG recently introduced an electronic Financial Analysis Quarterly and Surveillance System (e-FASS) system that requires rural · Sectoral distribution of credit banks to send their periodic returns electronically. · Advances subject to adverse classification · Aging analysis of loans 2.4.2 The Apex Bank's Role in Supervision Semiannual To help address the challenges of supervising RCBs, a law · Consolidated monthly and quarterly reports enacted in 200615 allowed the BoG to delegate some of its Annual returns supervisory functions to the Apex Bank, as follows: · Positions of facilities extended to directors and 1. maintain primary cash reserves of the rural and officers community banks in accordance with relevant rules, · Published audited accounts regulations, and policies; · Consolidated weekly, monthly, quarterly, and 2. monitor, inspect, examine, and supervise rural and semiannual reports community banks in accordance with relevant rules, Source: ARB Apex Bank. regulations, and policies; AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 8 CH A PTER 2 -- B A C K GR OUND 3. lend to rural and community banks facing temporary The rural banks' capacity-building program was aimed at liquidity problems; and increasing the banks' outreach through staff training and 4. provide specie management and specie movement investments in technologies. This component financed a services. large program of general banking and computer training for RCB directors, managers, and staff, as well as a special Although the ARB Apex Bank currently performs all the su- capacity-building program in microfinance for 15 RCBs and pervisory functions envisaged for it under the 2006 regula- a special training program for 8 RCBs that were categorized tions, the BoG continues to carry out both on-site and off- as mediocre at the beginning of the project.17 Under the site supervision. The full delegation of powers has been rural bank institution-building component, the project also constrained by structural, capacity, and resource constraints. financed the introduction of computers and other office Structurally, since the ARB Apex Bank is owned by the RCBs, equipment to improve the operational effectiveness of the its autonomy to supervise its members has been called into banks. question. It also has limited capacity to undertake off-site and on-site supervision, partly because of resource constraints. Through the training program in general banking, more than The Apex Bank neither has access to any funds from the BoG 8,000 RCB staff members were trained in a variety of topics, or GoG to perform this task effectively nor can it recover the such as customer care, treasury and credit management, costs from RCBs because regulations do not require RCBs anti­money laundering, internal controls, and check clearing. (or any other banks) to pay for supervision costs. The demand for and use of training provided under RFSP is particularly remarkable because cost subsidies for training were incrementally reduced and eliminated by 2005. Until 2.5 RURAL FINANCIAL SERVICES PROJECT AND 2003 the RCBs enjoyed a 50 percent subsidy on the cost OTHER MAJOR DONOR-FUNDED PROGRAMS of training, and in 2004 the subsidy was reduced to 25 per- Several donor-funded programs have supported the rural cent. In 2005 it was removed completely, and the RCBs also banks for years. Section 2.1 referred to some of these pro- pay 20 percent of the cost to the Apex Bank as an admin- grams. This section discusses some of the major recent and istrative fee. The special microfinance training program, the ongoing programs. Microfinance Support Initiative, trained 79 staff in RCBs that participated in this program, helped them prepare strategic plans for microfinance, and provided handholding services as 2.5.1 The Rural Financial Services Project (RFSP) these strategic plans were implemented. Training programs The RFSP (2000­07)--cofinanced by the World Bank, IFAD, on product design, internal controls, portfolio analysis, and and AfDB--had as its overall objective the reduction of rural governance were also conducted. In addition, strategic busi- poverty through the broadening and deepening of financial ness plans and training manuals were developed. The special intermediation in rural areas.16 The project had four major restructuring program helped the selected banks prepare components: (1) institution building in the informal financial restructured plans and upgrade the skills of their board mem- sector; (2) capacity building of rural banks; (3) institution build- bers, managers, and staff. ing of the ARB Apex Bank; and (4) institutional support to The project also financed full computerization of 4 rural banks the BoG's Banking and Supervision Department to enhance and partial computerization of 13 others. Initially, the project oversight of the rural financial sector. envisioned providing all rural banks, on a full cost recovery Following a midterm restructuring of the project, the activities basis, with four computers each, a photocopy machine, and financed under components 2 and 3 were either implement- wireless equipment. During implementation, however, it be- ed directly or managed by the ARB Apex Bank. Component came clear that providing hardware alone, without additional 3 provided most of the financing to establish office premises support for networking and training, did not support the in- for the Apex Bank and for operational expenses, including tended objective of increasing the operational efficiency of training of staff in the country and overseas. Component the rural banks. Project leaders thus decided to instead sup- 4 financed the training of BoG staff, procurement of vehicles, port full computerization of at least one branch in a selected and office and information technology equipment to facili- number of banks. Even this was found to be suboptimal, tate the supervision of RCB. This component also financed however, and it was decided that at least one RCB would be strengthening the microfinance oversight capacity of the fully computerized--that is, networked computers would be Ministry of Finance and Economic Planning. installed in the head office and all branches. RURA L B A NK ING C H A P T E R 2 -- B A C KGROUND 9 Currently, four banks are fully computerized. In these banks, benefits reported, however, include (1) enhanced effective- all operations in the head office and the branches are com- ness of oversight by BoG; (2) reduced staff overtime costs; puterized, and the branches are connected to the head office (3) improved customer service (on average, turnaround time through a wide-area network. Two banks have local area for customer services was reduced from 15 minutes to 3 network connections within their head offices and some minutes); (4) improved internal controls; (5) automated ledger branches, and 11 have at least one branch with a local area balancing; and (6) better monitoring of loan portfolios (World network. Bank 2008). The computerization program is also reported to ease implementation of the electronic Financial Analysis The overall quality of service delivery and financial perfor- Surveillance system (e-FASS) introduced by the BoG for mance of the rural banks improved significantly over the reporting of prudential returns. Since 2008 all rural banks period of project implementation. Key improvements in ser- have been required to submit returns using e-FASS. vice delivery include (1) 16 percent and 28 percent average annual increases in the number of depositors and borrowers, Finally, the project played a key role in the establishment of respectively; (2) 23 percent and 32 percent average annual the Apex Bank, which in turn was instrumental in managing increases in RCB deposits and loans, respectively (in real the capacity-building program for the RCBs, in introducing terms after adjusting for inflation); (3) a 61 percent average the MICR (magnetic ink character recognition) checks that annual increase in domestic money transfers (in real terms improved the acceptance of RCB checks, developing the after adjusting for inflation); (4) a reduction in check clear- domestic money transfer product, and providing improved ing from 2­3 weeks to 3­5 days; (5) approval of advances to investment options for RCBs through its brokerage services. salaried workers from 14 days to 3 days; and (6) improved turnaround time for withdrawals from more than 20 minutes 2.5.2 Support Program for Enterprise Empowerment to 9 minutes. In terms of financial performance, the number and Development (SPEED) of banks classified as unsatisfactory by the BoG based on SPEED is an ongoing project, started in 2004, and is cofund- capital adequacy declined from 28 RCBs (of 105) in 2001 to ed by the Danish government and GTZ, the German technical 16 RCBs (of 127) in 2007. The percentage of nonperforming support agency. The project facilitates the development of loans fell from around 20 percent at the start of the project to the financial market and business development services for 12 percent at the end of the project. micro, small, and medium enterprises of Ghana.20 The project focuses on the northern and more rural regions of Ghana and The project also resulted in several activity or component- has three major components: funding, technical assistance, level benefits to RCBs. Initial results of an assessment of and business development services. the impact of the various training programs on RCB perfor- mance, conducted in parallel to this study, finds that the gen- The funding facility provides refinancing funds to rural banks eral banking training program had a positive and significant to on-lend to small and medium enterprises at their own risk. impact on both service delivery and financial performance.18 The fund is disbursed through the Apex Bank. Three types of The quantitative impact of the training provided under the products are provided: (1) developmental loans with technical Microfinance Support Initiative or special training for me- assistance, up to a maximum of GHc 100,000; (2) a revolv- diocre banks, however, could not be identified because this ing fund of GHc 100, 000­300,000; and (3) terminal loans of dataset was much smaller. Nevertheless, descriptive data GHc 300, 000­500,000. The technical assistance component on the Microfinance Support Initiative does show that the of SPEED Ghana provides capacity-building support through participating banks also increased the number of their micro- training for rural financial institutions, including rural banks. finance clients and microfinance portfolios by 13 percent and Rural banks are the major beneficiaries of this component 25 percent respectively, while also being profitable. Twelve because of their proximity to rural areas. The training provid- out of 15 banks supported under the initiative increased their ed covers internal controls, risk and treasury management, microfinance portfolios in 2007 over 2006, and six of the and market research. banks increased their portfolios by more than 100 percent. This facility has also facilitated bank-to-bank learning and Too few RCBs have been fully computerized (only four), and experience-sharing forums. The business development for these banks only one to three full years of post-computer- services component supports business associations and ization data are available--too small a database to allow for an nongovernmental organizations with a focus on the tourism rigorous impact assessment of computerization.19 Anecdotal and wood products sectors and helps build their capacity to AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 10 CH A PTER 2 -- B A C K GR OUND deliver relevant services to their members on a commercially to support the retail institutions and become self- sustainable basis. SPEED has assisted about 18 rural banks sufficient. The primary focus will be on developing through its funding facility. and rolling out products that make financial services more accessible to clients. RAFiP will also support 2.5.3 Ghana Rural Banks Computerization and strategic planning, upgrading management informa- Interconnectivity Project (GRBCIP) tion systems, use of data benchmarking, and rating or other measures to attract external funding. GRBCIP is financed by the Millennium Challenge Corporation (MCC) and will provide support for computeriz- 2. Product development and innovation. Support for ing RCBs and savings and loans institutions.21 The program product development and innovation will improve the is being built on the RCB computerization program initiated ability of rural MFIs to serve more clients in different by the RFSP. About 30 RCBs are expected to participate niches and levels of agricultural value chains. This every year. Additionally, the program will establish a refi- component will build product development capability nancing facility to be provided to RCBs based on specific in the Apex Bank. eligibility criteria. 3. Linkages and technical support. Support will be provided to technical service providers (TSPs) includ- ing training and consulting services to rural financial 2.5.4 Rural and Agricultural Finance Program (RAFiP) institutions, technical assistance to agricultural produc- The focus of the RAFiP is on the rural banking sector (RCBs ers and value chains, and business development to and the ARB Apex Bank). It is designed to strengthen insti- micro, small, and medium-sized enterprises. tutional performance, outreach, and client orientation in all 4. Regulation, policy, supervision, and monitoring. segments of the rural financial system. It also seeks to inte- The program will provide support for the implemen- grate rural financial institutions more closely with each other tation of financial, private, and agricultural sector and with the financial system as a whole and link them to strategies. The primary focus will be on regulation support systems (particularly related to technical issues and and supervision of the rural banking network. Apex risk management of agricultural value chains). The specific organizations will also receive support to strengthen objective is to improve the rural and agricultural population's sectorwide performance monitoring and benchmark- access to sustainable financial services through enhanced ing capabilities. The program will support the engage- outreach, sustainability, and linkages. The program has the ment and training of banking inspection staff by the following components and activities: ARB Apex Bank. 1. Strengthening the rural financial system through 5. Knowledge development and dissemination. capacity-building activities. The program improves Knowledge development and dissemination services the ability of apex organizations at the meso level will be provided to apex organizations. RURA L B A NK ING C H A P T E R 3 -- B U S INE SS MODE L 11 Chapter 3: BUSINESS MODEL 3.1 OWNERSHIP AND GOVERNANCE sample analysis also showed that a limited number of direc- Rural banks are incorporated as limited companies un- tors have experience in banking. der the Companies Code of 1963 (Act 179) of Ghana and The board of a rural bank has three to five supervisory sub- are required to be owned by shareholders from the local committees covering the main aspects of managing and community in which they operate. At first, the BoG owned operating the bank. Members of the supervisory subcommit- up to 43 percent of shares in rural banks as preference tees are elected from the board based on specialization and shares. This practice was stopped in the 1990s. In the interest. The following are the main subcommittees and their early years of RCBs, the shareholding levels for an indi- respective responsibilities: vidual and a corporate body were capped at 10 percent and 30 percent, respectively. These levels have been revised to Loans subcommittee: ensures that loan approvals 30 percent for an individual and 50 percent for a corporate are in accordance with the operating policy of the body. An identifiable group can also own 40 percent shares bank and that loans disbursed are recovered; reviews in a bank. and approves loan applications; and follows up with delinquent clients and legal cases. The governance structure of an RCB comprises a board of Finance and audit subcommittee: monitors the directors that represents shareholders within the bank and financial performance of the bank; assesses the supervises the management of the bank. Boards of directors liquidity position of the bank and makes decisions on are elected by the shareholders from the communities where advances; monitors the bank's investments; reviews the banks are located. Election of board members takes the operational budget; ensures that accounts are place during annual general meetings (AGMs). Directors are prepared for audit; ensures that prudential returns elected on the basis of their reputation in the community are prepared and submitted; ensures provision for and professional qualifications. The individuals nominated by bad and doubtful loans; and ensures that policies and the shareholders are validated by the BoG before assignment manuals are updated and implemented. is effective. The board elects a chairperson and a vice chair- Disciplinary subcommittee: manages conflict among person from among the directors. In many cases, the chief the staff and takes disciplinary action in case of executive22 of the bank serves as the secretary of the board. misconduct. A board member is elected for a three-year term but can be reelected for an unlimited number of terms by the sharehold- The boards typically meet once a month. During this meeting ers. At every AGM, one-third of the board members need to the board approves loans above the approval threshold of the retire but are eligible for reelection, in accordance with the RCB management (above GHc 2,000, or US$1,542); reviews Companies Code of Ghana.23 However, a sample analysis of monthly reports from the internal auditor; examines portfolio 10 BoDs of RCBs showed that the average number of years quality; follows up on previous meeting actions; reviews re- spent as a board member is 11; the maximum was 32 and ports from supervisory subcommittees of the board; and un- the minimum was 1 year. dertakes strategic decisions and guidance for management. The minutes of the meetings are recorded and submitted to The minimum size of a BoD is five, and the maximum is 11. the BoG for monitoring and information purposes. Although the number of directors with voting rights cannot exceed the maximum allowed size, additional individuals can Shareholder services--such as share registries that are participate as coopted members. Based on a sample analysis essential to attract investors--are weak in rural banks. of 10 RCBs, only 9 percent of the directors are women. The Share registries of many rural banks are not up to date AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 12 CH A PTER 3 -- B USINES S M OD EL despite support provided for this purpose under RFSP. Until cashiers, and support staffs. Rural banks that provide susu recently many rural banks operated a system of equal vot- products have susu supervisors and susu collectors at the ing rights for each shareholder regardless of the number of branch levels. shares owned, thus creating no incentive for shareholders to increase their shareholding. This situation has been changed The total number of staff in all RCBs reached 5,703 in 2008. to voting rights based on the number of shares. The number of staff members varies, however, by the level of outreach. RCBs with a larger number of clients have larger Governance of rural banks is constrained by their difficulty staffs. Nearly half of the professional staffs are microfinance in attracting and retaining qualified directors, even though credit officers, and of these about 26 percent are women. these positions are generally considered prestigious. The The client­credit officer ratio is 208. opportunity cost for professionals with the necessary knowl- edge and skills to serve effectively as board members of financial institutions is often higher than what most rural 3.3 SERVICES banks can afford to pay as sitting fees or honoraria. In ad- As financial intermediaries, rural banks provide primary ser- dition, the amount of time directors are expected to spend vices consisting of savings, loans, and payments. Several attending board meetings, subcommittee meetings, and products are offered within each of these categories. Given other ad hoc engagements is typically higher than that in the community-owned nature of these institutions, they other organizations. also generally support community development services. As financial institutions actively supported by the govern- 3.2 STAFFING ment, RCBs offer special products and services for specific target groups on behalf of government- and donor-financed Figure 3.1 shows the typical organizational structure of a rural programs, such as Microfinance and Small Loan Center bank. The management staff is headed by a chief executive (MASLOC), the Social Investment Fund, the Community officer (typically called a supervising manager or general man- -Based Rural Development Project, and the Millennium ager), who reports to the Board of Directors. The core man- Development Authority. agement staff of RCBs includes an internal auditor supported by assistant accountants; a finance officer; a credit head sup- The rural banks use a variety of techniques to promote their ported by credit officers and project officers in charge of the services and products, including traditional outreach by bank microfinance portfolio; and a system administrator, if a bank staff and use of electronic and print media. For example, some is computerized. Some larger banks have additional depart- banks use local FM radio to promote their products (particu- ments, such as research and business development support larly microfinance) and broadcast information about services units. At the branch level, the structure typically includes a available. This approach has been successful in reaching many branch manager, an accountant, credit officers, clerks and clients in remote parts of the operational area. Several social occasions such as funerals have been used to disseminate important information such as repayment reminders. FIGURE 3.1: Organizational Structure of a Rural and Community Bank 3.1.1 Deposits Board of Directors Rural banks offer all the general savings products such as the regular savings accounts, current accounts, and time deposits. Typically, the largest share of the deposit portfolio Internal Controls in a rural bank is held in the savings account. Interest rates offered on these accounts are typically very low, however, and often negative when inflation is taken into account. In Bank Manager 2008 in the sample banks, interest rates on savings deposits varied from 5 to 16 percent, while inflation ranged between 11 and 18 percent. Further, interest on savings accounts is of- Finance Credit Microfinance Information and ten provided only when the savings balances are more than a Department Department Department Communication specified amount. Unlike in most commercial banks, however, Technology Department rural banks do not require high minimum balances to maintain Source: Authors' analysis based on organizational diagram of 12 RCBs. a savings account and do not charge a high ledger fee. RURA L B A NK ING C H A P T E R 3 -- B U S INE SS MODE L 13 BOX 3.1: Susu Collector: Rural Banks' Frontline BOX 3.2: Major Rural Bank Credit Products Deposit Mobilization Microfinance loans. These loans are provided to Rose Opoku Mensah is a susu collector who just grad- groups of individuals to finance small and micro income- uated from school and joined the bank. She has been generating activities. For some banks, the group is the working for the bank as a susu collector for one year. borrower, whereas for others, each member of the She has about 599 clients in five towns. She covers group is a borrower. In both cases, the group is jointly four towns and visits about 300 individuals in a day. liable for the loan. The size of a microfinance loan ranges Rose either walks between towns or uses public trans- between GHc 50 and GHc 1,000; most loans are be- portation to travel to towns and villages. tween GHc 100 and GHc 500. The term of a microfi- nance loan is four to six months, and the interest rate Source: Author interviews. ranges between 30 and 36 percent. Susu loans. These loans are provided to individuals fol- lowing a three-month susu deposit. The size and term A unique deposit offered by rural banks is their susu de- of susu loans are similar to those of microfinance loans, posits. These deposits are daily or weekly savings deposits but susu loans are provided to individuals whereas that are collected by susu collectors, who are either rural microfinance loans are group loans. bank employees or agents paid on a commission basis. This deposit and deposit collection technology builds on the tra- Salary loans. These loans, provided to salaried individu- ditional system of susu collectors in Ghana. Susu collectors als, are secured by the individual's salary, which is paid mobilize daily deposits by visiting individuals at their houses through the bank. The bank automatically deducts the and business premises. A susu collector has a schedule and loan repayment installment from the salary payments. an agreed savings plan with a client and collects the amount Salary loans are used for consumption and investment, of deposit according to the agreed plan. One susu collector as well as social purposes. The size of the loan is de- visits up to 300 clients per day (Box 3.1). Most of the susu termined by the salary of the borrower. The maximum collectors are men, whereas a majority of the participants term of a salary loan is 48 months, and the interest rate are women. Safety is an area of concern since the women ranges between 30 and 33 percent. physically carry money with them. Typically, no interest Commercial loans. These loans are provided to com- is paid on susu deposits, and depositors pay a fee for the panies and individual entrepreneurs for working capital service. or fixed capital. The maximum loan size is GHc 100,000, the maximum term is 36 months, and the interest rate Banks use different savings mobilization methodologies. ranges between 28 and 35 percent. Many banks use the susu approach. Some banks use deposit mobilization centers, which operate in the market on market Source: Various RCBs. days. Some rural banks also offer special deposit products that target specific target groups such as small traders and fishmongers, or purposes such as children's education 100. Not surprisingly, the top 10 percent of accounts, by (Box 3.2). size, hold 81 percent of the deposits whereas the 90 percent of smaller accounts hold only 19 percent of the deposits. Figure 3.2 shows that among the sample banks (12), regu- Although these small accounts make up only about one- lar savings is the largest type of savings product used, both fifth of the deposit base of the rural banks, these deposits in terms of number of clients (58 percent) and balances are more likely to be stable and are hence important to the (57 percent).24 As expected, susu deposit accounts have a banks. larger share of the number of accounts (21 percent) but a lower share of the total deposit balance (11 percent). In five of the sample banks, more than 20 percent of clients are susu clients; in three banks this proportion is less than Another indicator of the primary deposit clientele of the rural 20 percent, and in four banks there are no susu operations. banks is the percentage of deposits accounts that are below In Nzemamale rural bank, the bank with the highest propor- GHc 100 (US$77.1). In the sample banks, 90 percent of all tion of susu clients, 63 percent of its clients are susu clients, accounts have balances between GHc 10 (US$7.1) and 100 although they hold only 6 percent of the total balances. In (US$77.1), with only 10 percent of accounts larger than GHc Upper Manya Kro rural bank, however, the share of susu in AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 14 CH A PTER 3 -- B USINES S M OD EL FIGURE 3.2: Deposit Account Balances and Clients by Products, 2008 a. Deposit account balances and clients by products, 2008 b. Share of total clients 2% 1% 1% 8% savings accounts savings accounts 21% 11% current current susu susu 57% 58% fixed fixed 22% 19% special deposits special deposits Source: Authors' analysis based on 12 sample RCBs (2008). clientele and deposit balances is more even, at 31 percent proposals for credit. Then, credit officers assess the readi- and 28 percent, respectively. ness of the group members before releasing funds. This methodology is intended to reduce credit risk caused by The smaller size of deposit accounts and the concentration clients' inability to manage and use loans in a productive of a large number of deposit clients around these small-sized way that allows for repayment. The training is provided by accounts may imply that the rural banks are increasing the microfinance officers, and some RCBs outsource training to depth of outreach by serving poor clients. The susu products NGOs. The training typically includes education on savings; and savings mobilization instruments are particularly well the purpose of group formation; group management; good suited to the savings needs of poor clients. business practices; and bookkeeping. In addition to the fi- nancial education, clients also receive education on health 3.3.2 Loans and nutrition. The group is required to collect compulsory The major credit products offered by the rural banks include savings during the six-week training period to cultivate the microfinance loans, personal loans, commercial loans, salary habit of saving and managing funds. Following the satisfac- loans, susu loans, overdrafts, and others. Box 3.2 describes tory completion of the training and compulsory savings, the some of the major credit products provided by rural banks. group is eligible to obtain formal credit from the bank. The Microfinance loans and susu loans are the two special loan bank requires 10­20 percent of the compulsory savings as products that most directly benefit the low-income popula- collateral and a group guarantee of the loan. tion. A significant portion of the salary loans, however, would Figure 3.3 gives the share of clients and credit portfolio also be considered microloans in the Ghanaian context. in nine sample banks in 2008. Out of the total advances, Consequently, the microcredit portfolio of rural banks is larg- salary loans are the highest, with 33 percent of the total er than the sum of the microfinance and susu loan portfolios advances, followed by personal loans (24 percent) and shown in the loan classifications reported by the RCBs. microfinance (20 percent). In terms of size of clients, mi- crofinance loans have the most borrowers (31 percent) Most banks are using a "credit with education"25 approach followed by personal loans (26 percent) and salary loans adapted from Freedom from Hunger26 to deliver microfi- (22 percent). nance credit products. In this approach, banks educate and sensitize members of microfinance groups for about In six (out of nine) of sample banks, more than 20 percent six weeks before disbursing the loan. First, members of of clients are microfinance clients. Only one bank has no microfinance groups participate in a financial education microfinance product. In three banks--Borimanga, Upper program on basic bookkeeping and preparation of business Manya Kro, and Ahafo Ano Premier--about half of clients RURA L B A NK ING C H A P T E R 3 -- B U S INE SS MODE L 15 FIGURE 3.3: Loan Portfolio by Clients and Types of Products, 2008 a. Share of clients with different products b. Share of advances with different clients 5% 2% 6% 3% 6% 20% micro finance 6% micro finance 31% personal loan personal loan 8% 8% salary loan salary loan overdraft overdraft susu susu 22% others 24% others commercial loan commercial loan 26% 33% Source: Authors' analysis based on 9 sample RCBs (2008). are microfinance clients, and more than half of the loan port- in the "other" category, and microfinance in the trading cat- folio is in microfinance. The susu loan product is much less egory. The proportion of loans reported as being in agricul- popular. Only one bank, Kintampo, has a significant share of ture (9 percent) is an underestimate because a significant susu loans; 29 percent of its clients and 33 percent of its loan portion of microfinance and personal loans are used for portfolio are in susu loans. agriculture.27 Loans can also be categorized by sector: agriculture, cot- tage industry, trading, transport, and other. Figure 3.4, 3.3.3 Money Transfers based on data from 11 sample RCBs, shows that the two Rural banks offer both domestic and international money largest categories are trading and other (42 percent and transfer payments. Both these services are managed across 41 percent, respectively). Salary loans are typically included the network by the ARB Apex Bank. Domestic transfer pay- ments are offered through Apex Link, a domestic transfer system, set in place in 2003. Both inward and outward FIGURE 3.4: Distribution of Loans across Major money transfer services are available at all 455 outlets of Sectors, 2008 the rural bank network. Apex Link also allows for money transfer to and from other commercial banks and selected 9% nonbanks in Ghana. International money transfers are of- 6% agric, forestry and fishery fered through partnership agreements between the ARB Apex Bank and several major international money transfer cottage industry companies such as Western Union, Vigo, and Money Gram. 42% In 2008, rural banks facilitated 128,875 domestic money trading transfers worth about GHc 63.3 million (US$48.8 million) and 32,392 international money transfers worth GHc transport 9.3 million (US$7.1 million). 41% others (personal Both the domestic and international money transfer services loan) are provided by rural banks through a fee-sharing agree- 3% ment with the Apex Bank. The Apex Bank is responsible for Source: Authors' analysis based on 11 sample RCBs (2008). negotiating the fee-sharing arrangements with the external AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 16 CH A PTER 3 -- B USINES S M OD EL institutions--banks within Ghana for domestic transfers and has generally been a weak area in rural banks, with the result international money transfer companies. that the percentage of nonperforming loans has generally been higher than that in other financial institutions in the rural financial sector in Ghana. 3.3.4 Payment Payment services are a key service provided by rural banks. As in other lending institutons, lending in rural banks is typi- Rural banks provide this service through the Apex Bank, cally guided by credit manuals and credit policies approved which is a member of the national clearinghouse. The intro- by the boards. Some banks follow standardized credit ap- duction of MICR checks in 2002 gave rural banks' checks praisal procedures such as the one described in Box 3.3. the same legitimacy as checks issued by other financial Loans are assessed by credit officers and project officers. organizations. Before the introduction of MICR checks The assessment techniques vary by product. For individual guaranteed by the Apex Bank, many institutions and com- loans, the creditworthiness of the borrower is assessed on mercial establishments refused to accept rural bank checks. the basis of the individual's character, the purpose of the With the introduction of the check-clearing system in 2002, loan, and the credit history of the individual with the bank. the number of checks for clearing grew by an average of The level at which credit decisions are made also varies from 43 percent a year. bank to bank and has changed over time. In some banks, all credit decisions are made by credit committees in the head Because of their location and network of branches, rural office or by the board. In others, smaller loans are approved banks are used by the central and local governments and by branch-level credit committees. Until late 2008, loans private companies to make salary and pension payments to equivalent to and greater than GHc 2000 (US$1,542) were their employees in rural areas. The salary payment system in required to be submitted for review and approval by the BoG. particular enabled the rural banks to consolidate their salary Loans to members of boards of directors, regardless of their loan products that are closely tied with the salary transfers. size, are appraised and approved by BoG. With this excep- Licensed buying companies (LBCs) also use rural banks to tion, boards of directors can approve all loans amounts less pay cocoa-producing farmers in their catchment areas. In than 25 percent of the net worth of the bank. Loan amounts 2008, rural banks facilitated GHc 68.8 million (US$56 mil- lion) in payments to cocoa farmers and earned about GHc 2.75 million (US$2.1 million) in commissions. BOX 3.3: Credit Appraisal System in the Atwima Kwanwoma Rural Bank 3.3.5 Social Investments Many rural banks support social development activities in The Atwima Kwanwoma Rural Bank, a large rural bank, the communities where they operate as part of their social is located close to Kumasi, the second-largest city in responsibility to their communities. Activities generally sup- Ghana. ported include financing of infrastructure such as school The bank uses a credit appraisal system that it calls buildings, community libraries, and community roads, as CAMPRI, which stands for Character, Ability, Margin, well as scholarships for girls and medical students. These Purpose, Repayment capacity, and Insurance. "Ability" activities also help RCBs gain acceptance in their commu- stands for managerial ability and understanding of the nities as a locally owned financial institution rooted in the market. "Margin" stands for profit margin in the activ- community. ity being financed. "Repayment capacity" is assessed based on existing cash flows. "Insurance" refers to se- curity for the loan and consists primarily of cash security 3.4 SYSTEMS of 20­33 percent and one to three guarantors. No assets 3.4.1 Lending Technology and Credit-Risk Management are taken as collateral. Appropriate lending technology and credit risk management are among the most important factors in the sustainability of The bank requires that no more than 60 percent of the a lending institution. The tasks involve identifying creditwor- existing cash flow surplus is needed for loan repayment. thy borrowers, appraising and approving loan applications in Although interest rates on loans are fixed, credit com- a timely manner, managing credit portfolios so that revenue mittees can decide to give discounts for clients consid- is maximized and delinquencies minimized, and taking ap- ered to be highly creditworthy. propriate action in case of delinquency. This management Source: Authors' discussion with staff. RURA L B A NK ING C H A P T E R 3 -- B U S INE SS MODE L 17 greater than 25 percent of the net worth of the bank must be At the beginning of every year, internal auditors prepare an approved by BoG. audit plan. The plan consists of full inspection activities; snap checks; follow-ups on previous recommendations; special RCBs also use group lending and guarantees by salaried indi- investigations in case of staff problems; and other duties as- viduals to reduce credit risk. The use of insurance, asset col- signed by the board. A full inspection looks at all operations lateral, and other financial risk management tools is not com- of an agency, including cash accounts, current accounts, mon in the rural banks. Microfinance groups have monthly savings accounts, cocoa purchase accounts, interagency savings that are separate from the group loan account that operations, and others. Additionally, sample credit applica- will be used to repay the loan in case of default. Additionally, tions are reviewed. The internal auditor assesses whether the banks hold a certain percentage of all loans as security. the bank is properly following credit appraisal procedures and For microfinance loans, individual savings of group members whether the quality of the assessment process meets the are used as security. bank's requirements. Loan disbursement processes are also Boards of RCBs are increasingly involved in cases of delin- examined against the required operational procedures. The quency, and this has reportedly improved loan recovery. In process includes checking whether the proper interest rate cases of delinquency, the bank management usually notifies has been applied. A schedule is prepared for each agency, the board. The board and the credit officer follow up with and inspection visits are made without prior notification to the client. Board members may also visit the client at his or the agency. The internal control departments of many rural her household or business. If a loan is delinquent for three banks have reportedly been strengthened following incidents months, a demand notice is sent to the client and the case of fraud such as those discussed in Box 3.4. is transferred to the bank's lawyer. In some cases, village chiefs are also involved in persuading the borrower to repay the loan. In case of lending to individuals via a group, the BOX 3.4: Examples of Fraud Detected through Internal group chairperson, the treasurer, and other group members Controls work together to recover the loan from the individual. In some cases, groups have paid the amount due from their Case 1: In Bank N, fraud related to susu deposits was group savings. detected during inspection by the internal auditor. Susu collectors were not recording the correct amount collect- ed, and the deposits were misappropriated by the col- 3.4.2 Internal Controls or Operational Risk Management lectors. Significant mismatches between the amounts RCBs have operational manuals that stipulate managerial recorded in the susu passbook and the amount record- and administrative policies and procedures. All banks are ed in the bank ledger were identified. Following this dis- required to have internal auditors, who are responsible covery, the bank recruited susu monitors to supervise for internal controls.28 Internal auditors are expected to be and monitor susu collectors and daily susu transaction autonomous from the management and report to the audit balances. As a result of this measure, instances of fraud committee of the board. The internal auditor is responsible related to susu deposits have declined. for Case 2: Bank NM did not have an internal control depart- instituting internal control measures within a bank; ment until a major embezzlement involving the cashier ensuring that transactions of the bank are undertaken took place. The bank lost about GHc 20,000. The cashier according to the general regulations and operational was suppressing deposits without recording the bal- manual of the bank; ance in the internal ledger at the time of deposit. It was examining records to ascertain their originality and noted that the cashier had served on the same schedule minimize fraud; without any leave for more than two years. This pat- ensuring that risks are identified, prioritized, and tern was not detected until the cashier was away from reported; work one day and a client came to the bank to with- monitoring the credit cycle from appraisal to disburse- draw savings. Following this incident, the bank required ment, ensuring the integrity of the process, and advis- that staff should take annual leave as stipulated in the ing management on any change required; and, operational manual, and other security measures were strengthened. investigating and reporting on any irregularity in finan- cial management. Source: Authors based on interviews with rural bank managers. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 18 CH A PTER 3 -- B USINES S M OD EL 3.5 ASSOCIATIVE STRUCTURES making rural banks' checks as acceptable as checks 3.5.1 The Association of Rural Banks (ARB) from other financial institutions. The bank is currently in the process of facilitating participation of the rural In 1981 the 30 existing rural banks formed the ARB, with the banks in the automated clearinghouse with a com- support of the BoG, to serve as a forum for rural banks. The puterized system that uses scanned check images. association has nine regional chapters. Initially, the ARB's This system replaces the earlier system of manual functions were primarily to provide training to different target check clearing. groups. This role has been mostly taken over by the Apex Bank since its formation, however. The ARB continues to be 2. Specie supply: Although the Apex Bank was initially responsible for providing Code of Conduct training for rural fully responsible for the physical supply of specie to bank directors. The ARB played a key role in the formation the rural banks, it has now moved to providing this of the Apex Bank. Although it was initially proposed that the service on a need basis. Most rural banks now use ARB should cease to exist once the Apex Bank was formed, their own bullion vehicles to obtain cash from the it was later decided that the ARB should continue to func- Apex Bank branches. The role of the Apex Bank is tion, focusing primarily on advocacy with the government now primarily to maintain adequate specie supply and conflict resolution among its members. in collaboration with the BoG and, if necessary, to provide loans to the RCBs to purchase bullion vans. 3. Treasury management: The Apex Bank provides 3.5.2 The ARB Apex Bank brokerage services to the RCBs to purchase and The Apex Bank emerged as a result of the rural banks' felt rediscount Treasury bills and bonds, purchase Apex need for an institution that could provide financial, manage- certificates of deposit, and pay interest on clearing rial, and technical support. It was first recommended by a account balances. study commissioned jointly by the World Bank, the BoG, and 4. Loan fund mobilization: The Apex Bank also the ARB in 1996. The study recommended setting up an in- facilitates RCBs' access to funds from donor stitution similar to the Rabobank in the Netherlands. A subse- projects such as SPEED and other government-led quent feasibility study conducted in 1998 concluded that an interventions like the Agricultural Credit and the apex bank could be financially viable, and the ARB Apex Bank Poverty Alleviation Loan, the Community-Based was incorporated in 2000 as a public limited liability company Rural Development Project (CBRDP), and the Ghana with rural banks as shareholders. It was licensed in 2001 and Energy Development and Access Project (GEDP). started operations in July 2002. 5. Domestic and international money transfers: The The Apex Bank currently operates from its head office Apex Bank operates Apex Link, the manual do- in Accra and through its six branch offices spread across mestic fund transfer platform, which allows money Ghana. The first managing director, Emmanuel K. Kwapong, transfers across Ghana through the RCB network. came from the commercial banking sector with more than The bank is currently planning to move Apex Link 30 years of experience in Barclays Bank and served in to an electronic platform. In 2008 the Apex Bank this role for six years. Eric Osei-Bonsu, who took over as entered an agreement with Western Union to pro- managing director, had been president of the ARB. As of vide international money transfer services through 2007, the Apex Bank had a staff of 149. The Apex Bank RCBs and its own branches. Since then it has added board, consisting of 13 members, is currently headed by VIGO as a partner and plans to add other remittance Dr. Samuel Dufu. The board comprises nine representa- companies. tives from the regional chapters; one each from the ARB, 6. Information and communication technology (ICT): the BoG, and the MoFEP; and the managing director of the The Apex bank's ICT department provides installa- Apex Bank. tion and support services for RCB computerization. It supported the full computerization of 4 RCBs and The Apex Bank provides the following services to the rural partial computerization of 13 RCBs and provides banks: ongoing maintenance and troubleshooting services 1. Check clearing: The Apex Bank offers check-clearing to these banks. The Apex Bank will also coordinate services to the rural banks through the 11 clearing the implementation of GRBCIP, the US$20.3 million centers it operates across Ghana. As discussed in RCB computerization project being funded by the Section 3.3.4, this service played a critical role in Millennium Challenge Corporation. RURA L B A NK ING C H A P T E R 3 -- B U S INE SS MODE L 19 7. Training: As mentioned in Section 2.5.1, the Apex A key challenge facing the Apex Bank is becoming financially Bank provided or managed training that was financed self-sustainable. Its profitability steadily decreased between by the RFSP. It continues to provide training services 2003 and 2006 because of narrowing income margins,29 but to RCBs. the bank reversed this trend in 2007 and 2008. In 2008, the 8. Inspection and audit: Given the lack of funding for bank made a profit of GHc 1.2 million (US$925,212), an in- this activity from either the government or the BoG, crease of nearly 100 percent over the profit in 2007. The bank the Apex Bank currently restricts this service to benefited from a tax holiday that expired in 2009, however, "marginal" banks and to special assignments. and its after-tax profits are thus bound to decline. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER C H A P T E R 4 -- P E R FORMANCE 21 Chapter 4: PERFORMANCE 4.1 SERVICE DELIVERY BOX 4.1: Profiles of a Range of Clients Table 4.1 shows the outreach of rural banks and other Case 1: Asumdwe Kuw is a microfinance group with financial service providers operating in the low-income seg- 34 members, mostly women. A group of members ment. Rural banks have the largest market share in client contacted the RCB in their community to seek support outreach (67 percent of depositors and 48 percent of bor- in forming a group and in obtaining credit for their micro rowers) as well as deposit and loan balances (60 percent of businesses. The bank trained the group for six weeks and deposit balances and 57 percent loan balances). The cases formed a group eligible to obtain credit. Before joining the in Box 4.1 provide profiles of a cross-section of rural bank bank, the members explained that they had no access clients. to formal credit. Most of them depended on family net- works and moneylenders. Some had saved with savings 4.1.1 Deposits and Loans and loans but could not get loans because of the size of their savings. Now they are able to receive loans for their Rural banks cater primarily to the low-income and middle- businesses against small savings. Categories of business- income segments of the population. The rural banks serve es include small shops, snacks, and charcoal trading. The primarily smaller clients because of several factors, including maximum loan per member is 100 GHc. Repayment is local ownership, regulation, and capacity. Most clients of the collected every Friday during a meeting organized by the banks are teachers, government employees, pensioners, and group and attended by the bank's credit officer. The group small and micro entrepreneurs. Some banks, however, do is primarily responsible for ensuring timely repayment of have relatively large clients that obtain part of their financial loans by members. Members of the group also have susu service needs from rural banks. accounts with the bank and receive susu loans. The total outreach of the rural banks has steadily increased Case 2: Tisungta Ba farming group has about in recent years. As shown in Figure 4.1, outreach increased 24 members. Out of these, one of them is a woman. from 1.1 million depositors and 139,000 borrowers in 2000 to Individuals in the group are involved in small-scale 2.8 million depositors and 680,000 borrowers in 2008. These farming activities. They grow maize, groundnuts, and figures represent average annual growth rates of 14 percent soybeans. The group has a treasurer, a chairman, and a in depositors and 27 percent in borrowers. secretary. Members of the Tisungta Ba started borrow- ing from the bank to finance production and market- ing of their produce five years ago. Before joining the bank, the group members had supported each other TABLE 4.1: Client Outreach by Different Financial through free labor on each other's farms. At that time, Institutions, 2004­07 (in thousands) the sale of animals was one of the sources of funds INSTITUTIONS 2004 2005 2006 2007 for their agriculture activities. Presently, the group has RCBs 119 120 122 125 received two cycles of loans. Each member received Savings and loans 10 12 11 14 about 50 GHc with a repayment period of six months Credit unions 261 273 279 322 and a 28 percent annual interest rate. The group has been repaying within the stipulated repayment sched- Financial NGOs 29 29 20 40 ule. The source of repayment funds is not always Susu collectors 911 1,016 1,000 1,259 agriculture. During times of bad weather or lower Source: GHAMFIN 2007 (Continued) AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 22 CH A PTER 4 -- PER FOR M A NC E BOX 4.1: (Continued) address the problem of credit constraint in rural areas. As Figure 4.1B shows, however, annual growth rates, though prices for agriculture produce, the farmers repay from always positive, fluctuated significantly. The growth rate of other income-generating activities. borrowers shows a generally increasing trend over the period Case 3: Collins Parker rears grasscutters (a small ani- 2003­07, the period over which RFSP was implemented. In mal used for meat) in a small village in Brong Ahafo. He contrast, the rate of growth of depositors seemed to taper also manages another small business operated from his off starting in 2005. household. He received a loan from his community bank During the same eight-year period, the total amount of de- to support grasscutter rearing. The loan will be repaid posits, adjusted for inflation, grew from GHc 17.3 million within two years. This schedule was drafted to match (US$5.8 million) to GHc 100.6 million (US$77.5 million), and the production period of the grasscutter, a feature Collins total advances grew from GHc 7.1 million (US$2.4 million) to likes. He has now started repaying the loan. GHc 72.8 million (US$56.1 million). These figures represent Case 4: Shaibu Muniru is an entrepreneur in Walewale real average annual growth rates of 4 percent for deposits district. He manages a limited liability company that in- and 11 percent for loans. Figure 4.2 shows the growth of cludes (1) a beverage distributor, (2) a gas agency, (3) an inflation-adjusted deposit and loan balances in RCBs. Both FM radio station, (4) a construction company, and (5) an deposit and loan balances show a positive growth trend, but exporter of nontraditional products. One of the owners loan balances grew at a much faster rate, showing the suc- of the company is a founding member of the rural bank cess of RCBs in increasing lending. Although this increase in that district. The company uses the bank's overdraft became necessary because of the falling interest rates on facility. Shaibu reports that the amount of the over- Treasury bills during this period, the significant efforts taken draft facility is way below the demand of the business. under the RFSP to increase lending also likely contributed to Additionally, the term of the bank's loans is too short for this growth. Nevertheless, as Figure 4.3 illustrates, the year- the company to use the credit products. Yet this com- to-year growth in both deposits and loan balances continues pany is one of the bank's biggest clients. to fluctuate sharply, suggesting that the RCBs go through periods of rapid increase and sharp decrease in deposit mo- Source: Authors' interviews with clients. bilization and loan disbursements. The significant growth of rural bank outreach among 4.1.2 Money Transfers and Payments depositors and borrowers demonstrates the ability of the Between 2003 when Apex Link was introduced and 2008, rural banks to provide services to an increasing number of the number of domestic transfer transactions consistently in- clients. Most important, increasing numbers of borrowers creased, rising from 10,158 to a peak of 128, 875 in 2008. The FIGURE 4.1: Outreach Overview of All RCBs, 2001­08 a. Number of depositors and borrowers, 2001­08 b. Annual growth rates of depositors and borrowers, 2002­08 3,000,000 depositors borrowers 70.0 depositors 64.8 2,500,000 60.0 borrowers % annual growth rate 2,000,000 50.0 1,500,000 40.0 32.3 30.0 26.8 27.8 1,000,000 22.7 20.2 20.0 18.1 19.7 15.3 500,000 10.0 14.2 5.1 5.7 7.1 5.9 - 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 Source: ARB Apex Bank 2008. RURA L B A NK ING C H A P T E R 4 -- P E R FORMANCE 23 FIGURE 4.2: Real Deposits and Loans of All RCBs, representing average annual real growth rates of 69 percent 1999­2008 and 95 percent, respectively. 120.00 total deposits (GHc'M) 100.00 total loans (GHc'M) 100.62 4.2 FINANCIAL PERFORMANCE total balance in GHc'M 95.26 80.00 81.47 4.2.1 Asset Quality 72.77 67.35 The extent of nonperforming loans in a financial institu- 60.00 62.62 55.91 tion's loan portfolio is often considered the best leading 49.10 40.00 43.71 indicator of the institution's financial performance. A low 41.41 ratio of nonperforming loans to the total outstanding loan 28.69 30.93 20.00 23.65 26.08 portfolio is often correlated with low financial expenses 17.23 18.02 10.90 14.78 and higher profitability. A low nonperforming loan portfolio 7.07 9.80 0.00 also necessitates a lower spread for the financial institu- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 tion between the interest it pays on its deposits and the Source: Authors' estimates based on ARB Apex Bank (2008). interest it charges on its loans, thereby benefiting its average annual growth from 2003 to 2008 was 46 percent. customers. The transaction value rose from in 2003 GHc 2.7 million Although networkwide data are not available on this indica- (US$2.2 million) to GHc 63.3 million (US$48.8 million) by tor, sample studies suggest that this is one of the weakest 2008. In real terms, the average annual real growth of do- areas of RCB performance. Among the sample RCBs used mestic transfers over the past four years was 53 percent. in this study, the average portfolio at risk (PAR) > 30 days30 Because international money transfers managed by the Apex is much higher than the average ratio for their Microbanking Bank started only in 2008, growth performance cannot be Bulletin (MBB) peer group (16 percent compared with 3 per- analyzed for this service. Nevertheless, this service achieved cent). The PAR > 365 days, which is a good proxy for the a significant number of transactions and value within the first loan loss rate because loans that are delinquent for more year. In 2008 the Apex Bank facilitated international money than a year have little chance of being repaid, is more than transfers worth GHc 9.3 million (US$7.1 million) in 32,392 double that of their MBB peer group (3.5 percent compared transactions just through one provider. with 1.5 percent). The number and value of checks cleared have also increased Figure 4.4, based on a separate sample analysis of 24 RCBs significantly since the Apex Bank started providing this service by GHAMFIN (2007), also shows that RCBs have higher ra- to the RCBs. Between 2002 and 2007, the value of checks tios of nonperforming loans than do savings and loans and delivered increased from GHc 43.66 million (US$36.3 million) financial NGOs in Ghana. The large margin between these to GHc 384.90 million (US$386.7 million), and the value two ratios for RCBs, in contrast to the MBB peer group ra- of checks received increased from GHc 17.97 million tios, also suggests that loan losses are not as large an issue (US$14.39 million) to GHc 295.67 million (US$236.83 million), as delayed payments. Nevertheless, the higher loan loss rate FIGURE 4.3: Annual Growth of Real Deposits and Loans of All RCBs, 1999­2008 FIGURE 4.4: PAR > 30 Days of All RCBs with 60% Comparators % of annual growth rate of total RCBs deposits loans 52% 2004 50% 45% 40% 13% 2005 40% 36% 11% 34% 35% 2006 10% 37% 30% 28% 22% 7% 21% 21% 6% 20% 17% 18% 4% 4% 19% 3% 2% 10% 12% 11% 8% 6% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 FNGOs S&Ls RCBs Source: Authors' estimates based on ARB Apex Bank (2008). Source: GHAMFIN 2007. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 24 CH A PTER 4 -- PER FOR M A NC E means that RCBs must recover these losses by charging FIGURE 4.6: Real Annual Profits of All RCBs, 2000­08 higher interest rates on their loans. 5.00 4.58 4.50 4.00 3.67 real profit (GHc'M) 4.2.2 Solvency 3.51 4.12 3.50 3.56 Adequacy of capital is intrinsically critical for banks because 3.00 2.73 3.19 2.50 of the nature of the business they undertake. The primary 2.46 2.00 business of banks is financial intermediation--that is, using 1.50 money provided by depositors to make loans to borrowers. 1.50 1.00 Lending is inherently risky because the loans may not be paid 0.50 0.00 back, resulting in financial losses to the bank. Hence, banks 2000 2001 2002 2003 2004 2005 2006 2007 2008 are expected to have adequate capital to remain solvent even if some of the loans may result in significant losses. Source: Authors' estimates based on ARB Apex Bank (2008). The BoG requires RCBs to maintain a 10 percent capital Not all RCBs in the network, however, are solvent. In 2008 adequacy ratio. seven RCBs were insolvent, five of which negative net worth As Figure 4.5 shows, the inflation-adjusted net worth (capi- in excess of 10 percent. The number of RCBs with very low tal) of the RCB network has steadily increased in the period capital or negative net worth decreased rapidly from 26 in 2000­08 and is well above the minimum required 10 percent. 2001 to 16 in 2003, but this number has remained fairly steady since then. FIGURE 4.5: Real Net Worth, All RCBs, 2000 20.00 18.29 4.2.3 Profitability 18.00 Profitability is key to any business because it allows the busi- 16.00 14.00 15.70 ness to expand and provide more and a broader range of GHc million 12.00 13.83 12.80 services to a larger number of people. Figure 4.6 shows that 10.00 11.07 8.00 7.06 as a network, RCBs have demonstrated an increasing trend 6.00 in annual profits, with significant decreases only in two out of 5.52 6.23 4.00 4.52 the past nine years. As with solvency status, however, not all 2.00 0.00 RCBs are profitable. In 2008 five RCBs made losses. Among 2000 2001 2002 2003 2004 2005 2006 2006 2008 the sample banks, one RCB became profitable in 2008 after Source: Authors' estimates based on ARB Apex Bank (2008). several years of making losses. RURA L B A NK ING C H A P T E R 5 -- L E S SONS, KE Y ISSUE S, AND WAY F ORWA R D 25 Chapter 5: LESSONS, KEY ISSUES, AND WAY FORWARD As a network, RCBs have shown commendable performance with very little direct financial support by the in both service delivery and financial performance over the government. past decade. Both depositors and deposits have been grow- Both poor operating environments and capacity ing, though at a slower pace in recent years. The growth in constraints can adversely affect performance. Factors the number of borrowers and in lending has been remarkable constituting poor operating environments include and demonstrates that rural banks are steadily transforming absence of clear prudential regulations, both financial themselves into financial intermediaries that are able to (such as capital adequacy) and nonfinancial (such as successfully transform deposits into loans. This develop- qualifications of directors), and excessive directed ment marks a significant turnaround from being institutions lending requirements leading to concentration of that primarily collected rural deposits and invested them in lending. Treasury bills. The rapid growth in domestic money transfer Although capacity constraints in rural areas do affect services and significant uptake of the international money the performance and limit the scope of operation of transfer services introduced in 2008 suggest that RCBs are local financial institutions, the Ghanaian experience emerging as full-service financial intermediaries. also shows that targeted investments in building ca- pacity can have positive payoffs. This finding suggests In addition, as a network, RCBs are operationally and finan- that initiatives to build local financial institutions need cially self-sufficient. They have operational and financial self- to have significant capacity-building components. sufficiency ratios that are comparable with those of other similar institutions in Ghana (savings and loans) and exceed The requirement of location-specific ownership of median values for MFIs in the mature MFI peer group of insti- RCBs is a key factor constraining the growth and tutions reporting to the Microfinance Information Exchange consolidation of the network. This requirement (MIX) database. The net worth of RCBs has also shown an prevents the institutions' managers and owners from upward trend over the past decade. merging to take advantage of economies of scale and from attracting external investors from the financial Within the network, however, the performance of a significant markets. number of RCBs continues to be weak. Although the number Local financial institutions themselves often can- of such RCBs has decreased over the past decade because not self-provide or obtain several services (such as of turnarounds or liquidation, they still constitute about 15 specialized training, product development, market percent of all RCBs in operation. The key issue though is not research) they need from the market, either because the weak performance of this group per se31; it is the inability they are not available or because the institutions do of the regulatory system to identify these failing institutions not have the scale to obtain these services. Hence, at an early stage and facilitate a process that leads either to initiatives to build local financial institutions will have a cost-effective liquidation, a turnaround, or a merger with a to support the creation of associations or federations stronger institution. that can either provide such services or facilitate their cost-effective provision. Lessons drawn from the experiences of Ghanaian rural banks These institutions, however, such as the ARB Apex can be summarized in the following points: Bank, can face capacity challenges in management Rural communities have the capacity to create their and service provision. These challenges would then own profitable financial institutions. In Ghana rural dictate the business and revenue model for the communities created hundreds of such institutions institution. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 26 CH A PTER 5 -- LES S ONS , K EY IS S UES, A ND WAY FORWA R D Even if a good legal, policy, and regulatory environ- of institutions. This complacency appears misplaced given ment are provided, failures of a certain number of that the latter group of institutions is the one that primarily institutions should be expected. This issue should be shares the market niche to which RCBs cater. addressed up front, however, by ensuring that the regulatory system has the necessary capacity in terms Several RCBs are already undertaking measures to increase of skills, political autonomy, and financial resources. their competitiveness. These measures include an increased focus on microfinance services (primarily susu deposits and Donor funding for supervisory activities cannot sustain microfinance group loans, but also susu loans and other a supervisory regime in the long run, and mobiliza- types of small-value loans); participation in international tion of private funding to supervise services delivered money transfer services; and computerization of bank opera- to poor clients is not a feasible option. Government tions. Some of the frontrunners are trying to use technology resources are thus fundamental to ensure adequate to improve services. For example, the Kakum Rural Bank is supervision of services delivered to poor clients. piloting a mobile banking operation to allow clients to check Governments can shift some of the resources used their balances via mobile text message or SMS. This bank from directed and subsidized credit to subsidizing is also establishing an automated teller machine in one of supervision of financial institutions serving poor its branches and planning to introduce a smart card for susu clients. products. Finally, the length, breadth, and scope of the Ghanaian experience offers the potential for carrying out a rigor- A second option being considered by RCBs is the possibility ous impact assessment of rural finance and a cost- of mergers and acquisitions to allow economies of scale in benefit analysis of public investment in rural finance.32 the face of strong competition. The Apex Bank appears to Although such a study is beyond the scope of this be supportive of this option, including the option of merging paper, the RCB experience offers fertile ground for this all RCBs under the ARB Apex Bank into one bank and trans- type of study. forming individual RCBs and their branches into Apex Bank branches. Another option is a regional-level consolidation. Unsurprisingly, however, the latter option does not seem to 5.1 RCBs: BECOMING COMPETITIVE, have much support among the RCBs because of their unique RETAINING MISSION ownership and governance structures. The challenge for RCBs is to become more competitive while retaining their mission of providing services to a broad It is clear that to become more competitive, RCBs need to range of clients in rural areas. The analysis of their perfor- change at two levels. First, at the individual RCB level, RCBs mance suggests that although they have succeeded to a need to improve their service delivery and financial perfor- large extent in providing deposit and payment services, they mance. To succeed in this endeavor, however, many RCBs have succeeded less in providing credit services. Since 2002, would need significant high-quality support from the Apex however, their performance in credit services has rapidly Bank, even though they may have the financial capacity to improved. Domestic money transfer services has been an pay for these services. Second, at the network level, a sus- area where RCBs have been highly successful, registering tainable solution needs to be found for the RCBs categorized a 50 percent real growth rate over the past five years. The as distressed or weak by BoG. Some may have to be merged rise in international money transfers since the service was with another willing RCB or forced into liquidation. Others introduced network wide in 2008 has also been strong. may need external support for which they do not have the capacity to pay. Support for these banks would need to be With increased competition from commercial banks, S&Ls, subsidized, but they may have the potential to emerge as CUs, and FNGOs, it is imperative for RCBs to become more profitable financial service providers. competitive. The BoG has made it clear that it will not protect RCBs from competition. Some commercial banks have en- tered the rural financial markets in major way, often targeting clients of the rural banks and their personnel. S&Ls, CUs, 5.2 THE APEX BANK: TRANSFORMING INTO and FNGOs have also expanded their outreach significantly. A SUSTAINABLE SERVICE PROVIDER Interactions with managers of the sample RCBs, however, The Apex Bank was created primarily as a service provider seem to show that RCBs are more concerned with competi- to the RCBs. Its strategic goal has been to "achieve financial tion from commercial banks rather than the other categories sustainability based on a service model" by improving the RURA L B A NK ING C H A P T E R 5 -- L E S SONS, KE Y ISSUE S, AND WAY F ORWA R D 27 quality and scope of the products and services it offers to the automatic teller machine (ATM) network operated by RCBs and any other financial institution outside the network. Cooperative Bank in Kenya, which allows its member coop- The Apex Bank also envisions increasing its capital base from eratives to offer the service of nationwide cash withdrawal existing shareholders--the member RCBs, the BoG,33 and to their members. A value-added technology service that investors outside the network. The service provider model the Apex Bank could offer consists of queuing management is getting another look, however, primarily because of the systems that can help reduce customer wait times and im- challenges the Apex Bank is facing in becoming fully self- prove staff productivity. sufficient under this model and because of the option of mergers for RCBs discussed in the previous section. Finally, for the Apex Bank to become sustainable, its role in supervising RCBs needs to be clarified and the costs in- In 2008 the bank introduced full cost recovery for all its ser- volved need to be fully covered. The options for doing so are vices, including banking and nonbanking services. The Apex related to the future structure of the RCB network, discussed Bank is also considering the option of converting into a full- in the previous section, and the roles of the BoG and GoG, service commercial bank and or opening a banking branch. discussed in the following sections. The current system in This option could provide the opportunity to bring in larger which the Apex Bank subsidizes the costs of supervising revenues to maintain sustainability, but it could be perceived the RCBs from the meager resources it generates from the as a threat by the RCBs. services it provides is not sustainable. It is clear that the Apex Bank needs to become financially self-sustaining sooner rather than later. This step should not 5.3 THE BoG: TOWARD EFFECTIVE come, however, at the expense of the mission of the RCB DELEGATED SUPERVISION network, which is to increase provision of services in rural Weak supervision of the rural banks continues to be an issue. areas in a sustainable manner. Discussions with the RCB The BoG has been unable to take effective action on rural managers and analysis of data reveal that there is a definite banks that do not meet prudential requirements. It is also need, demand, and benefit for the services provided by the not able to carry out tasks such as liquidation in a timely man- Apex Bank because it is costly (and in some cases unafford- ner because of political pressure to allow even "distressed" able) for individual RCBs to procure highly complex special- RCBs to operate at the risk of causing financial losses to ized services on their own. shareholders and depositors of the affected bank. The discussions and analysis also suggest that RCBs need Global experience suggests that directly supervising rela- other services that are not available from the market at a tively small financial institutions, such as rural community reasonable cost. Examples category include (1) shareholder banks in Ghana, is not an efficient option for central banks registry management and shareholder education, (2) internal because of the high transaction cost of the function. One audit services--most rural banks are too small to attract good sustainable option is to delegate most of the supervision internal audit staff, (3) product development services--few tasks to an external entity while retaining key tasks such as organizations in Ghana can provide this much-needed service licensing and liquidation. The delegated or indirect supervi- to RCBs at a reasonable cost, (4) strategic advisory services, sion approach is practiced in many countries, including Brazil, including risk management, (5) technological upgrades be- Canada, France, Germany, Mali, Niger, and Peru. Experience sides computerization, and (6) loan syndication services. from these countries suggests that an indirect supervisory Provision of these services and others to the member RCBs regime for small financial institutions such as financial co- can generate additional revenue for the Apex Bank, signifi- operatives and community banks ensures supervision and cantly contributing to the financial sustainability of its service monitoring of financial institutions according to their special provider role. needs, ownership, and governance structure, while keeping transaction costs reasonable. RCBs often lose their best commercial customers to com- mercial banks because they are unable to provide loans of Lessons from delegated supervision models, however, un- the size required by a growing commercial establishment. derscore that the independence of the delegated supervisor The Apex Bank could potentially provide loan syndica- from control by the supervised units and a strong commit- tion service, under which it can facilitate lending to these ment by the ultimate supervisory authority are critical to make customers by more than one RCB. Another example of the delegated supervisory model work. The effectiveness of a value-added service provided by an apex institution is the current supervisory arrangement involving the BoG and AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 28 CH A PTER 5 -- LES S ONS , K EY IS S UES, A ND WAY FORWA R D the Apex Bank is weak because of the structural, capacity, The major measures needed include ensuring that there and resource constraints discussed earlier. The Apex Bank are adequate resources for supervising the RCBs and fully has no sanctioning powers, and even if it had such powers, compensating RCBs when they are called upon to deliver ser- their effectiveness would likely be limited because the Apex vices for the government. Because commercial banks do not Bank is owned by the RCBs. If the current arrangements are pay for being supervised, it is not reasonable to expect that to be continued, the Apex Bank department that performs RCBs should do so. Although the share of supervision costs the supervisory role will at least have to be effectively "ring devoted to RCBs is disproportionately higher than their share fenced" from the service provider part of the bank. This solu- of assets in the banking system, the positive externalities that tion can also help address capacity constraints by attracting result from wider access to financial services in rural areas the necessary human resources, particularly if a way is found justify devoting these resources. Rural and community banks to sustainably fund the supervision activities. provide essential services in many remote, underserved areas of the country that would otherwise have no formal access. Subsidizing the initial stages of the delegated supervisory regime will be necessary until the system evolves enough to 5.4 THE GoG: INCENTIVIZING SERVICE be able to finance inspection from its own sources. DELIVERY TO THE POOR The Government of Ghana has generally played a remark- Lastly, the government can create additional mechanisms for able role in facilitating the establishment of and growth of the consumer protection. An explicit deposit insurance mecha- RCB network. In contrast to most countries, where excess nism can be useful if accompanied by stronger regulatory regulation and political interference virtually destroyed rural sanctions on poorly performing banks. A "salvage operation" financial institutions--whether development banks or finan- mechanism suggested by Cuevas and Fischer (2006) can cial cooperatives--Ghana successfully changed over time also be created to finance the reforming, closing, and merg- many of the regulations that constrained the growth of the ing of RCBs to prevent the loss of public deposits. Finally, RCB network. Nevertheless, the government should consider the government can devote additional resources to improv- undertaking some additional measures to further strengthen ing financial literacy in rural areas. This measure would both the RCB network and to enhance access to financial services increase demand for financial services and reduce the implicit in rural areas, particularly for low-income households and cost RCBs incur when delivering services to a less financially small businesses. literate clientele. RURA L B A NK ING ANN E X 1 29 Annex 1: MAP OF GHANA WITH RCB AND APEX BANK LOCATIONS Apex Bank Head Bolgatanga office & centres * rural & community banks Upper West Upper East Northern Wa Brong Ahafo Volta Western Ashanti Eastern Central Greater Accra Tamale Hohoe Sunyani Kumasi Ho Eastern Cape Coast Accra Takoradi AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER ANN E X 2 31 Annex 2: SAMPLE FRAMEWORK OF 12 RCBs KEY INDICATORS RURAL BANKS COMPUTERIZATION OPERATIONAL AREA OFFICES AGE PERFORMANCE 1 Ahafo Anao Partially computerized Periurban 4 20 Mediocre 2 Atwima Fully computerized Periurban 6 20 Satisfactory 3 Boriamango Manual Rural 1 5 Satisfactory 4 Kakum Fully computerized Periurban 10 25 Satisfactory 5 Kintampo Partially computerized Rural 3 25 Strong 6 Nsoatreman Manual Rural 1 13 Fair 7 Nyakrom Partially computerized Periurban 6 33 Fair 8 Nzemamale Manual Rural 3 20 Fair 9 Odotobri Partially computerized Periurban 5 20 Mediocre 10 Upper Manya Kro Manual Periurban 3 20 Satisfactory 11 Wamfie Manual Periurban 5 20 Satisfactory 12 West Mamprusi Manual Rural 1 12 Satisfactory AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER ANN E X 3 33 Annex 3: TIMELINE OF EVENTS RELEVANT TO RCBs Year Events 1976 First RCB established 1981 Association of Rural Banks (ARB) founded 1982 Akuafo Check system introduced 1985 Operational manual for RCBs established Temporary ban on opening new RCBs 1989 Rural Finance Project started 1991 Liberalization of the financial market through financial sector adjustment program 1996 Reserve requirement increased to 62% 1998 Maximum number of RCBs reaches 133 1999 23 distressed banks liquidated 2000 Rural Finance Services Project started 2001 ARB Apex Bank licensed 2007 Currency redenomination launched 2008 Rural Financial Services Project closed 18 RCBs qualified for Ghana Club 100 AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER REFERENCES 35 REFERENCES Agwe, J., R. Esangga, and R. Kloeppinger-Todd. 2007. Ghana Study IFAD (International Fund for Agricultural Development). 2008. The Tour ARB Apex Bank Ltd. and Rural Financial Services Project. Republic of Ghana Rural and Agricultural Finance Program Washington, DC: World Bank. (RAFiP). Rome. Agwe, J., and R. Kloeppinger-Todd. 2008. Computer Automation Isern, J., J. Abrams, and M. Brown. 2008. Appraisal Guide for in the Rural Banking Network in Ghana: A Status Assessment. Microfinance Institutions Resource Manual. Washington, DC: Washington, DC: World Bank. Consultative Group to Assist the Poor (CGAP), World Bank. Andah, D. O., and W. F. Steel. 2003. Rural and Microfinance Regulation MEL Consulting. 2008. "Completion Report of Design of a Manual in Ghana: Implications for Development and Performance of the and Methodology for Microfinance Outreach Capacity-building industry. Africa Region Working Paper Series No. 49. Washington, Initiative for Product Development, Innovation, and Client DC: World Bank. Support for Rural/Community Banks." Accra. ARB (Association of Rural Banks). 1998. "A Feasibility Study on the Mensah, W. A. 1993. "Study of the Rural Finance Sector in Ghana." Proposed ARB Apex Bank for Rural Banks." Accra. Unpublished Unpublished paper. report. Microfinance Information Exchange (MIX). 2008. Microbanking ARB Apex Bank Limited. Various years. Annual Reports, 2006­2008. Bulletin Issue 17 (Autumn): 33­41. Accra. Osei-Bonsu, E. 1998. "The State of Rural Banks in Ghana." Paper ------. 2007. Financial Statement of FY 2007. Accra. presented at a seminar of the Association of Rural Banks, November, Accra. ------. 2008. Five-Year Strategic Plan 2009­2013. Accra. Pande, R., and R. Burgess. 2005. "Can Rural Banks Reduce Poverty? Bank of Ghana. 2008. Economic and Financial Review. Monetary Evidence from the Indian Social Banking Experiment." American Policy Committee Papers. Accra. Economic Review 95 (3): 780­95. ------. 2008. Rural Banks Classification Data. Accra. Ranade, C. G. 1994. "Rural Finance in Ghana." Accra. Unpublished Cuvas, C., and K. P. Fischer. 2006. Cooperative Financial Institutions: paper. Issues in Governance, Regulation, and Supervision. Washington, Rural and community banks. 2000­08. Financial statements, DC: World Bank. 2000­08, of 15 RCBs. GHAMFIN (Ghana Microfinance Institutions Network). 2007. Steel, W. F. 2006. "Extending Financial Systems to the Poor: What Performance Monitoring and Benchmarking 2007. Accra Strategies for Ghana?" Merchant Bank Annual Economic Lecture Gonzalez, A., and R. Meyer. 2009. Microfinance and Small Deposit at the Institute of Statistical, Social, and Economic Research Mobilization: Fact or Fiction? Data Brief No. 2. Washington, DC: (ISSER), Accra. Microfinance Information Exchange. World Bank. 1989. "Staff Appraisal Report of Ghana." Rural Finance Government of Ghana. 2002. Banking Act 2002. Accra. Project. Washington, DC. ------. 2004. Banking Act 2004. Accra. ------. 2000. "Project Appraisal Document of the Ghana Rural Financial Service Project (RFSP)." Washington, DC. ------. 2006. ARB Apex Bank Limited Regulation, 2006 (L. I1825). Accra. ------. 2009. "Implementation Completion and Results Report of the Ghana Rural Financial Services Project (RFSP)." Washington, ------. 2007. Banking Amendment Act, 2007. Accra. DC. AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER END N O T E S 37 ENDNOTES 1 At a later stage the ARB evolved into a strategic alliance Banking Act 2004, and Banking (Amendment) Act 2007. 13 between RCBs, and the ARB Apex Bank was formed in Under the Companies Code of Ghana 1963 (Act 179). 14 2002. As per the ARB Apex Bank Limited Regulations, 2006 (L.I. 2 Not all RCBs have internal auditors. 1825). 3 15 Susu deposits are small savings collected daily from This section draws primarily on World Bank (2009). 16 clients by individual collectors going door to door. Susu The last component was intended to support 22 banks that collectors have long operated outside the formal system were rated as mediocre at the beginning of the project. in Ghana. Recently RCBs as well as other commercial Because of budgetary constraints, however, only 8 could banks have started to link up with susu collectors to be provided with additional support under the special re- mobilize deposits from the public. RCBs hire susu collec- structuring program. All 22 banks received training under tors as part-time agents or employ them as regular bank the general banking training program. 17 staff to manage this special product. A susu option in a This assessment is still ongoing. The analysis controlled bank provides susu depositors a secure place for saving for regional, time, and inflation effects. 18 and access to loans using small deposits. Interest rate Among the four fully computerized banks, one bank com- earnings on susu deposits, however, are insignificant. pleted this process in 2005, two in 2006, and one in 2008. 4 19 Ghana has 10 administrative regions. www.speedghana.org. 5 20 Banks with less than 10 percent capital (net worth as a Millennium Challenge Compact with Ghana, Executive percentage of adjusted assets) are rated as mediocre, Summary, August 2006. 21 and those with negative capital are rated as distressed. Supervising managers of RCBs, as they are called in some 6 This section is drawn primarily from Program Design RCBs. 22 Report, Rural and Agricultural Finance Programme, (IFAD Sec. 298 of the Ghana Companies Code of 1963, Act 179. 23 2008, updated with data from the World Bank's World De- The number of accounts is used as a proxy for the number velopment Indicator database. of clients using a particular type of product. 7 24 Under this system any buyer of cocoa is required to pay It is currently called "Credit and Savings with Education." 25 farmers by check instead of with cash. Farmers wanted Freedom from Hunger is a registered nongovernmental, rural community banks in their own areas to reduce the nonprofit organization with a vision of a world without cost of traveling longer distances to cash checks. poverty. 8 26 RCBs were required to lend about 50 percent of their total Based on authors' discussion with clients and credit loans and advances to agriculture, 30 percent to cottage officers. 27 industries, and 25 percent to other activities. Some RCBs do not have internal auditors because they are 9 When the project ended, expenditures on the project unable to attract and pay for qualified internal auditors. 28 were US$28.4 million. Of the US$20 million contribution The "narrowing income margins" that led to the steady from the International Development Association, US$15 decrease in profitability were due in large part to declining million was a credit line for rural banks and $5 million Treasury bill rates, as early profits were based heavily on went to an institution-building component. investment of initial funds in high-return Treasury bills. 10 29 High-priority sectors include agriculture, export trade, and PAR > 30 days refers to the value of all loans outstanding manufacturing. that are more than 30 days past due. 11 30 At the same time, the secondary reserve requirement Failure of a certain percentage of financial institutions is to was eliminated for commercial banks. be expected in any market economy. Even before the onset 12 As stipulated in the Bank of Ghana Act 2002 (Act 612), of the financial crisis in 2008 leading to a wave of new bank AGR I C U LT U R E A N D RURAL DE VE L OP ME NT DISCUSS ION PA PER 38 END NOTES 32 failures, some banks failed every year in the United States. The Apex Bank envisions obtaining a universal banking In the seven-year period from 2000 to 2007, 30 banks failed license for low-risk products and preference shares and (www.fdic.gov, accessed on August 24, 2009). getting a regulatory capital in the form of grant from BoG 31 Pande and Burgess (2005) is a good example. (ARB Apex 2008). RURA L B A NK ING Agriculture and Rural Development (ARD) 1818 H Street, NW Washington, D.C. 20433 USA Telephone: 202-477-1000 ARD AGRICULTURE AND RURAL DEVELOPMENT Internet: www.worldbank.org/ard