In most African countries including Ghana, the rural private sector consists largely of households and small-scale enterprises that operate outside the formal financial system. Many small farmers and small businessmen and Businesswomen live in remote areas were banking is limited, cost of production and risks in productions are high. The recent global financial crises have made acquisition of credit (loans) even more difficult. For smaller firms, farms and entrepreneurs in rural areas of Ghana, initial sources of capital are typically personal savings, borrowing from friends or family and retirement funds. In spite of the above, there was barely any institutionalized financial intermediation in the rural areas before the establishment of Rural and Community Banks (RCBs) in 1976.
The clientele that constitutes the target of RCBs tend to possess the following characteristics: generally sole proprietorship; started with own savings; easy entry into the market place; low skill; experience low or no growth even with financial service; have high rates of collapse; have low productivity; sell whatever they make or serve directly to the consumer; and operate in trade associated with low margin, street vending and food services (Owusu-Ansah, 1999).
Rural and community banks (henceforth referred to as rural banks or RCBs) are a network of 127 independent unit banks in Ghana. They are regulated by the Bank of Ghana and thereby form part of the regulated financial sector in Ghana. These banks are the largest providers of formal financial services in rural areas and also represent about half of the total banking outlets in Ghana (IFAD 2008). By the end of 2008, these banks together had 421 branches. Including head offices, there were 548 service delivery locations spread throughout the country. All administrative regions have at least one bank, although most are located in the Ashanti, Western, Eastern, and Central regions of the country. 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 signifi cantly. Out of the 127 RCBs, 75 percent have assets between GHc 1 million (US$771,010) and GHc 8 million (US$6.1 million), 20 percent have assets of less than GHc 1 million, and 5 percent have assets over GHc 10 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).
As a network, RCBs have achieved a remarkable level of service delivery and financial performance. At the end of 2008, they had deposits of GHc 343.9 million (US$265.1 million) from more than 2.8 million clients, and loans and advances of GHc 224.7 million (US$173.2 million) with about 680,000 clients. They delivered 128,875 domestic money transfers worth around GHc 63.3 million (US$48.8 million) in 2007 and 32,392 international money transfers worth GHc 9.3 million (US$7.1 million) in 2008. They also facilitated check transactions worth GHc 993.7 million (US$766.1 million) in 2008. RCBs made a consolidated profit of GHc 15.6 million (US$12.0 million) in 2008 and had a consolidated net worth of GHc 62.3 million (US$48.03 million). Several have excelled in performance, both within the financial sector and in the broader private sector. Some rural banks have figured more than once in Club 100, a group of 100 Ghanaian institutions recognized annually for business excellence.
Several challenges, however, remain. The Bank of Ghana (BoG) rated the performance of 17 of the 127 rural banks in operation as mediocre, based on capital adequacy, and it categorized 5 banks as distressed. Among the banks whose performance is categorized as mediocre, 6 rural banks have negative net worth. The apex bank of the network, which was created primarily to provide services to rural banks, is not yet fully financially self-sufficient and has inadequate resources to effectively perform its functions (Nair A. & Fissha, A., 2010). The BoG, which is primarily responsible for supervising RCBs, is constrained in effectively performing its supervision role because of political and civil society pressures, resource constraints, and limited delegation of supervisory functions to the Apex Bank.
Before the establishment of the first rural bank in 1976, the availability of formal credit in rural communities predominantly made up of small farmers and fishermen was extremely limited. The main sources of credit were moneylenders and traders charging exorbitant interest rates. The Government of Ghana had taken some policy measures to improve access to finance in rural areas. These measures included a requirement that commercial banks lend at least 20 percent of their portfolio for agricultural uses and the establishment of the Agricultural Development Bank (ADB) in 1965 with an exclusive mandate of lending for agriculture and allied industries in rural Ghana. Subsequently, commercial banks and the ADB opened branches in rural areas, with an emphasis on cocoa-growing rural areas. Nevertheless, lending to the rural sector remained low; the commercial banks used their rural branches primarily to make payments to cocoa farmers and collect deposits for lending in urban areas. Other banking services, like credit, were not provided as initially envisioned. Commercial banks demanded higher deposit accounts and stronger collateral requirements to provide loans to rural areas. Many small farmers and fishermen did not have deposit accounts in commercial banks, and the collateral they had available was not satisfactory for commercial lending (Andah and Steel 2003). Mensah (1993) and Ranade (1994) found that the ADB’s credit provision and coverage were limited. Only 27 percent of its branches were in rural areas, and lending to smallholder farmers made up only about 15 percent of its total portfolio.
In view of this, the Government of Ghana (GoG) considered supporting the establishment of community banks in rural areas that would be dedicated to providing financial services in those areas. It asked the BoG to send a delegation to the Philippines to study the rural banking system there and afterward decided to facilitate the opening of banks in rural farming and fishing communities.
1.2 Statement of the Problem
The establishment of rural banks has provided rural folks such farmers and other entrepreneurs with access to financial service, such as savings and other forms of accounts, personal loans and business loan. Access to finance has comparatively made livelihood at most communities much easier as compared to when these financial services did not exist. This is because more farmers are able to buy insecticides, pesticides, fertilizers, send their wards to school and at whole improved the food security in these communities. Other entrepreneurs also have access to expand their businesses. Although rural banking greatly changes the livelihoods of community folks the issue of loan repayments by clients of these rural banks lives little to be desired. There are huge unrecovered loans, especially loans given out to groups and associations. These unpaid debts stifle the operations of the rural banks and make them unable to give out more loans to its customers. This research paper is an attempt to evaluate the loan recovery strategies employed by Assinman Rural Bank in the Central Region of Ghana.
1.3 Significance of the Research
This study is an attempt to contribute to the debate in development literature on loan recovery strategies of rural banks in Ghana and its effect on the livelihoods of inhabitants where these rural banks exist. Such information may be vital for policy makers, government and donor agencies involved with the design and support for rural financial services. Thus this intention of this study is to come out with the causes of unpaid loan in the community. Recovery strategies used by the rural bank under study and also to recommend appropriate interventions by the bank to reduce unpaid loans.
1.4 Research Objectives
The main aim of this research is to access the current loan recovery strategies of Assinman Rural Bank. Its specific aims are to find out the sources of the banks funds and its uses; causes of unpaid or unrecovered loans in the bank; the loan recovery policies put in place by the bank; and finally to recommend strategies to effectively recover loans by the bank under study.
1.5 Research Questions
The study is guided by the following research questions:
What are the sources and use of funds by Assinman Rural Bank?
What are the causes of unrecovered loans offered to customers by the Bank?
What are the loan recovery strategies used by the Bank?
How effective are these strategies to the recovery of loans offered to customers?
What recommendations can be made to formulate good strategies to recover loan offered to customers?
1.6 Justification of the Study
The justification of this study is based on the pre-assumption that development and implementation of effective loan recovery strategies by Assinman Rural Bank will make it an efficient financial service provider as it will provide further loans for other people to improve their livelihood.
1.7 Scope of the Study
The study will be conducted at Assinman Rural Bank of the Central Region. Three Branches namely, Cape Coast Branch, Assin Foso and Assin Manso Branch will be selected among other branches of the bank. The study will cover the key strategies for effective loan recovery methods used by the bank. The literature review discusses issues such as recovery formally through policies -interest exemptions, credit committees and interest rates - and informally through elected local government officials and local socio-political leaders. The methodology employed is clearly explained in chapter three of this write-up.
1.8 Limitation of the Study
The key constraint facing this study is accessibility of reliable data as rural household often does not keep records. However, efforts were made to collect data from different sources (ie using both the questionnaire and interview methods).
1.9 Organization of the study
The study has been arranged into five (5) different chapters to ensure an orderly and systematic presentation of study.
Chapter one, which is the introduction to the study, covers the background of the study, the statement of the problem, the objective of the study, the research questions, the justification of the study, the limitations and the organization of the study.
The second chapter, which is titled literature review, gives a theoretical background of what has already been done on the subject matter in the past and their intended relevance to the study.
Chapter three deals with the methodology of the study, which consist of the population, techniques used in the study, data analysis procedures and the limitations related to the study.
Chapter four provides the data analysis and discussion of the findings.
Chapter five covers the summary, conclusions, recommendations for the study.
