Graphic Business News

Are rural, community banks safe and resilient?

By: Joseph Akossey
Dr Ernest Addison — BoG Governor
Dr Ernest Addison — BoG Governor

ACCORDING to the Efficiency Monitoring Unit of ARB Apex Bank Limited Report for the third quarter of 2018, there are over 140 rural and community banks (RCBs) with branch network of over 700 spread across the country.

The rural banking sector has been performing exceedingly well when it comes to promoting rural financial intermediation.

This has resulted in impressive financial inclusion especially among people in the rural communities.  The sector has also contributed positively towards corporate social responsibility in their catchment areas.

 However, the recent financial crisis triggered by collapse of some banks has dented some confidence in the banking sector. Bank customers have therefore become, sophisticated and discerning when it comes to selecting a bank to transact business with.

Potential customers are much more concerned about banks’ ability to protect their deposits and giving them assurance of having access to their funds at any point in time without hindrance. They also want to deal with Banks and Specialised Deposit Taking Institutions that can manage their funds prudently and engage in practices and behaviours that keep them safe and sound.

In fact, customers are confronted with high perceived risk with regard to depositing their funds with banks. In other words, they are afraid of losing their hard-earned savings. No wonder there is migration of deposits from perceived weaker banks to stronger banks. This implies that most Ghanaians would like to do business with Banks and Specialised Deposit Taking Institutions which are perceived to be safe and resilient.

The question therefore arises, “Are rural and community banks safe and resilient?” This article will discuss the above-mentioned thought-provoking question.

Notwithstanding the fact that the rural banking industry might have its own challenges like any human institution, the industry as a whole can be described as safe and resilient. This could be justified by means of the financial soundness indicators published by the Efficiency Monitoring Unit of the ARB Apex Bank Limited for the 3rd quarter of 2018.

Furthermore, data collected from a sample of RCBs by Proven Trusted Solutions indicated that a number of RCBs were doing well despite the financial turmoil.

At this point the article will focus on some key financial soundness indicators of the rural banking sector and some individual players.

However, before I begin with the financial soundness indicators, I would like to commend the 23 RCBs which were rated strong by the EMU of the ARB Apex Bank during the third quarter of 2018. Among them are: Ahafo Ano Premier, Mponua, Fiaseman, Amenfiman, Kintampo, Nzema Manle, Atwima Kwanwoma Rural Banks.

Financial Soundness Indicators
Capital adequacy Ratio (CAR)
Capital adequacy ratio is one of the key financial soundness indicators of banks. The current prudential limit set by the Bank of Ghana is 10 per cent.
According to the Efficiency Monitoring Unit Report by the ARB Apex Bank Ltd for the third quarter of 2018, the rural banking industry recorded an average CAR of 16.92 per cent at the end of September 2018.

This was higher than the regulatory benchmark of 10 per cent. This is an indication that the rural banking industry as a whole is solvent, strong, safe and resilient.

The capital adequacy ratio is a key indicator used to measure the solvency of a bank. It measures a bank’s capital in relation to its risk – weighted assets. In other words, CAR is expressed as a ratio of a bank’s capital to its risk-weighted assets (Adjusted Capital base as a percentage of Adjusted Assets Base). Scores of rural banks have capital adequacy ratios which far exceed the prudential benchmark of 10 per cent.

The rural banking industry is constrained by certain factors that limit the players’ ability to make more profit. For example, most rural banks have their branches in rural communities where economic activities are low and this hinders their ability to mobilise more deposits to trade with.

Unlike the major banks whose target market are predominantly corporate entities and high net worth individuals, the target market of RCBs are mostly the bottom of the pyramid.

The cost of doing business with the bottom of the pyramid segment of the banking population is high. Thus, increasing the cost of income ratio of the RCBs and this erodes their profit. For example, it is common to see Mobile Bankers of RCBs travelling a long distance to visit susu customers to collect deposit as low as GH¢2. This no doubt increases the cost of mobilisation and by extension total cost of operation.

Currently, the minimum paid up capital of RCBs is GH¢1million. In contrast, the universal banks have a capital requirement of GH¢400million and this gives them the strength to engage in big ticket transaction to boost their income as well as profit.

It is worth mentioning that in view of the restricted nature of RCBs banking business, they over-rely on interest income and this tends to have adverse effect on their profit especially at this time that interest rate on the money market instrument as well as loans are dropping.

The universal banks on the other hand have various sources of income other than interest income on loans and investment. For example,the universal banks offer international banking products and services such as letter of credit, documentary bill for collection, foreign transfer (outward transfer also known as SWIFT) foreign exchange transaction among others.

The international banking products and services mentioned above help the universal banks to earn much income and profit as well as diversifying their income portfolio. Nevertheless, scores of RCBs are able to make impressive profit to create shareholders value.

Among them are: Atwima Kwanwoma, Fiaseman, Amenfiman, Juaben, Mumuadu, Builsa (Bucobank), Nzema Manle, Manya Krobo, Kintampo, Adansi, Ahantaman etc.

Liquidity has been described as life blood of banks and hence is one of the key financial soundness indicators. 

Liquidity is the ability of a bank to meet its financial obligations as they fall due for payment. Customers expect to have access to their funds when they visit the banking hall.

Therefore, liquidity challenges which make it difficult for customers to access their funds will result in loss of confidence and trust. In an extreme situation it can lead to bank run. In fact, liquidity risk can result in demise of a rural bank.

According to the Efficiency  Monitoring Unit of ARB Apex Bank report for the third quarter of 2018, the industry liquid assets to total assets was 48.13 per cent which is above the bench mark of 40 per cent. This shows that the industry in general is liquid.

From the discussion so far, it can be concluded that the rural banking industry as a whole is safe and resilient based on key financial soundness indicators. Also, some individual players in the industry as discussed in the article are doing extremely well.

The government should therefore support rural banks to grow in order to deepen rural financial intermediation. The government should also do its utmost to review downwards the corporate tax which was increased from eight per cent to 25 per cent to enable RCBs continue to support the developmental agenda of their communities.

The Bank of Ghana (BOG) and ARB Apex Bank should also strengthen their supervisory role with respect to the RCBs in order to promote a strong, stable and resilient rural banking sector. The Bank of Ghana (BOG) should also introduce corporate governance directives that will meet the unique characteristics of RCBs with a view to promoting good corporate governance practices.

Existing and potential customers as well as the public at large should have trust and confidence in RCBs. They should continue to transact business with them because the industry as a whole is safe and resilient.

The public should appreciate the fact that RCBs are neither sole proprietorship business nor owned by a few individuals. They are community-based financial institutions owned by many shareholders. The board of RCBs account their stewardship to shareholders every year through AGM. The RCBs are also supervised by the Bank of Ghana and ARB Apex Bank Limited and this serves as point of difference.

The Author is the Head of Proven Trusted Solutions, an employee training and development and marketing research firm.
Contact: 0207725859 / 0244517833
Email:This email address is being protected from spambots. You need JavaScript enabled to view it. / This email address is being protected from spambots. You need JavaScript enabled to view it.