Challenges of Rural Financial Inter-mediation …the experience of Rural Banks


Financial Intermediaries can be defined as financial institutions such as rural banks, commercial banks, savings and loans companies, and credit unions that accept deposits from the public and makes loans to those needing credit.  Rural banks act as a middleman between cash surplus units in the economy (savers) and deficit spending units (borrowers).

Financial intermediaries make it possible for borrowers to tap into vast pools of wealth in federally insured deposits accounting for more than half of financial assets held by all financial services companies in banks and other depository financial institutions. Financial Intermediation involves mobilising and transferring savings from surplus to deficit units, and provides safe, liquid and convenient savings (deposits) facilities and access to credit facilities tailored to the needs of rural populations.

History of Rural Financial Intermediation in Ghana

The history of rural financial intermediation started when Agona Nyakrom Rural Bank, the first rural bank, was established in the Central Region of Ghana in 1976 to provide banking service for the rural population – providing credit for small-scale farmers and businesses, and supporting developmental projects. From 1976 to date, there has been an increase in the number of rural and community banks serving the rural population by providing quality banking services.

In the case of rural financial inter-mediation, the experience of rural banks in Ghana shows them acting as middlemen between savers and borrows – by accepting deposits from the rural public and giving loans out of these to those needing credit in the rural communities.

Basically, financial intermediation is the root institution in the saving-investment process. Ignoring it would seem to be done at the risk of irrelevance. So, the viewpoint of this paper is that financial intermediaries are not a veil, but rather the contrary. In this paper, I survey the result of recent academic research on financial intermediation.

Traditionally, banks play an important role in allocating resources from those who have a surplus of funds (deposits) to those who have a shortage of funds (borrowers) by transforming relatively small liquid deposits into illiquid loans.

During the intermediation process, banks also provide other services – such as payment and delegated monitoring. Since the 1970s deregulation, technological development and globalisation have significantly transformed the banking sector. Banks have to face increasing competition from rivals in both the banking sector and the non-bank firms.

Although this article is specifically focusing on the rural banks in Ghana, it is necessary to address the broad role of financial intermediaries in the market, as rural banks at first are a special group of financial intermediaries. In order to understand what banks do, we should first make it clear why financial intermediaries exist.

Traditionally, understanding the existence of financial intermediaries starts from market imperfections. Financial intermediaries perform as agents that transfer funds from people who have surplus of funds to people who have a shortage of funds.

In a perfect market where borrowers and lenders have perfect knowledge and there were no transaction costs, financial intermediaries would be unnecessary. However, those assumptions are not present in the real world. There are frictions such as transaction costs and information asymmetries occurring in the market, and this makes the existence of financial intermediaries rational.

Financial Intermediation Strategies and Practice of Rural Banks in Ghana

The basic functions of rural banks are mobilisation of savings and extension of credit to deserving borrowers or customers in their area of operations.  It is also the belief of the central bank of Ghana that, through their financial intermediation roles, rural banks will act as catalysts for economic development in rural Ghana.

A lot of progress has been since their establishment in 1976. Deposits have been mobilised, loans have been granted, the habit of savings and thrift have been inculcated into the minds of rural dwellers, jobs have been created for rural people as managers, accountants, project officers, cashiers, drivers, cleaners etc.

Rural banks in Ghana have long-term and short-term strategic plans for mobilisation from depositors of the bank, and in the course of performing their financial intermediation roles lend to borrowers of the bank in need of financial assistance to operate their business.

In lending to borrowers from the depositors, the rural bank seeks secure methods of repayment while at the same time meeting the depositors’ demand for their deposits. However, the financial intermediation roles and practice of rural banks have challenges in the contemporary rural financial market. The bank in practice uses both short- and long-term strategies mobilising funds from depositors for good short-term lending to borrowers of the bank.

As the mobilisation of funds forms the main core function for onward-lending to borrowers, the management intensifies various mechanism and marketing strategies for mobilising more funds from the depositors. The rural banks have five-year strategic plans on mobilisation of funds from the public, giving them out as loans to prospective loan customers or borrowers.

Rural banking challenges in financial intermediation

The research study on generalist investigations revealed 80% of them result in the following as challenges of Rural Financial Intermediation – the experience of Rural Banks in Ghana:


Risk in the rural economy is related to the dominance of agriculture, which risk is high and often covariant. The long gestation period of agriculture investments and seasonality of output usually leads to uneven performance.

Information asymmetry

The borrowers of rural banks have more information about the outturn of their investment and greater capacity to repay loans than lenders. Access to borrower information is impeded by lack of communication infrastructure and well-functioning assets registries and databases. Also, in rural areas most customers do not keep records of their transactions and do not use the bank’s payment facilities.

Weak Institutional capacities

Weak institutional capacity of rural banks is related to limited availability of educated and well-trained people in the rural communities where the bank is operating.

 Lack of suitable collateral

Lack of collateral on the part of rural bank borrowers has limited access to credit for rural customers, and is related to poorly-defined property and land-use rights as well as weak land and property markets.

Enforcement Problems

Rural banks experience enforcement problems: even where borrowers have assets that can be used as collateral security, they are often not acceptable to the rural bank because of high cost and long delay in using judicial enforcement mechanisms in delinquent loan repayment cases.

 High cost of operation

High operating costs are due to the small size of most of the rural customers’ accounts in relation to service delivery – due to a low level of economic activity.

 Lack of funds to give out as loans

My research established that most rural banks lack funds to give out as bank loans to it numerous borrowers or customers. The banks’ main core function is mobilising to give back to customers as loans.

Lack of qualified personnel as staff

The study established that only two out of twenty personnel in charge of credit/loans and marketing are graduates, and this leads to lapses in their work as far as credit delivery is concerned – creating at times missing files of borrowers in monitoring and recovery.

 Lack of logistical resources for operations

The rural banks lack logistics for operations that reach out to all operational areas, more especially monitoring, marketing, loan recovery and other business assignments.

Gender Distribution of the Sample Population

The research revealed that the customers are dominated by females, thus 60% females and 40% males. Out of the 25 customers sampled for the questionnaire and interviewed, 18 were females and 7 males. These customers are borrowers of the rural bank.

 Deposit Transformations into Bank Loans

The pie chart below shows how rural banks channels funds between surplus and deficit agents. Thus, the bank is transforming the bank deposits from customers into bank loans.

Figure 4.10.8:   The pie chart shows transformation of bank deposits by customers into bank loans by rural banks

The study revealed that 70% of the total deposits received from customers as bank deposits are transformed into bank loans for borrowers in need of financial assistance. 30% of the total deposits are always reserved to meet the demand as of when and where the need arises.

As the core function of the rural bank is mobilizing from customers in the form of deposits, these are transformed into bank loans for customers.

This constitutes channeling funds between lenders and borrowers indirectly. That is, Savers (lenders) give funds to an intermediation Institution like a Rural Bank, and that Institution gives those funds to spenders (borrowers). As a result of this, the bank depends largely on funds from savers in financing loans

       General Analysis of the finding

It was established from the study that rural banks – even though contributing meaningfully toward economic development of the rural communities – face certain challenges in the financial intermediation role they play. The challenges established from the research affect the banks’ effective performance.

The study revealed that Risks, lack of suitable collateral security, High cost of operating, Enforcement problems, lack of logistical resources for operations, lack of qualified personnel as staff, lack of funds to give out as loans, weak institutional capacity, and formal banking procedures and physical access difficulties. The research established these as the main factors affecting financial intermediation in the rural financial market.


The rural banks in Ghana have been generally playing their role of financial intermediation in the rural financial markets. The financial intermediations come as Rural Banks accept deposits from the public and makes loans to those needing credit as customers or borrowers.  The study aimed at investigating the actual challenges faced by rural banks in Ghana.

The research findings and possible recommendations to address the challenges of financial intermediation in the rural economy where rural bank operations are very crucial, as the research is also to inform all other rural banks in Ghana – creating awareness of the prevailing challenges facing the rural banking industry in financial intermediations for minimisation of and possibly overcoming the said challenges.


 About the writer

 The writer is a Chartered Management Consultant, Chartered Economist and currently with Cine plus Consulting Group.

Contact: 0275341964     e-mail: [email protected]

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