The role of rural banks in Ghana’s future economic development

Photo: Rural Bank managers in a conference

It is increasingly recognised that we live in a VUCA World, characterized by Volatility, Uncertainty, Complexity and Ambiguity. The Covid-19 pandemic has shown how quickly major economic disruption can occur.

Leading economies suddenly see numerous businesses facing bankruptcy. The dislocation, coupled with the impact of new technology, will accelerate the pace of change. To prepare for the future, we need to explore opportunities and develop new approaches. In the context of Ghana, author of this article, who is the CEO of JCS Investments, is urging the government to collaborate with relevant entities to develop a plan that strengthens rural SME operations.

This will include improving the national supply chain where the rural and community banks play a key role; we should remember that the revenue generated in rural areas contributes significantly to Ghana’s GDP.

The importance of developing the rural economy in a sustainable manner has become even more evident following the impact of Covid-19. Many countries are now reviewing economic assumptions and taking steps to re-orientate their supply chains to embrace more local economic activities.

Coupled with climate change issues and the global goal of ‘carbon neutral’ economies by 2050, new sustainable supply chains become increasingly important. Ghana has a part to play in the overall process.

The ARB Apex Bank is a mini central bank that offers support services to rural and community banks. It has identified the need to create an ‘ecosystem’ for the rural banking system.  This involves creating the conditions that enable them to function efficiently, including the ability to raise new funds.

GAX is one of the platforms that can complement the capitalization of rural banking systems. However, it is recognized that the system needs to be improved and the current bottlenecks addressed. Should a rural bank list its shares, this also gives current shareholders a market that enables them to release some or all of their shares.

Photo: Patricia Safo

In this new reality, JCS Investments might be described as a BIO (boutique impact organisation). The firm has a keen interest in the rural banking sector and gathers information on rural and community banks (RCBs).

This is part of a plan to ensure the RCBs complement other initiatives by the Apex Bank and Ministry of Finance. The aim is to address some of the bottlenecks JCS has identified. This will enable the sector to move a number of the rural banks towards a listing on the Ghana Alternative Market (GAX). JCS is also working with key stakeholders to improve operations and add value. The company also works closely with farmers and processors operating in the rural economy.

Rural Banks in Ghana

Rural and community banks have demonstrated that they have a key role in supporting the development and the reduction of poverty. However, significantly more work is required to develop business networks and improve supply chain capability. Over time, targeted investment in the rural economy will contribute to new skills and capability that bring significant economic benefit. Improving the national supply chain will act as a catalyst that supports economic developments in these areas. However, the capability and responsiveness of the rural banking system is central to sustainable change.

They have a key role in the geographical areas where they are located. This means that ‘triple bottom line’ (noted as TBL or 3BL) need to be at the forefront of business thinking. The challenge is to balance social, environmental (or ecological) and financial considerations.

In addition to directly creating all the social and economic benefits through employment opportunities, TBL thinking also aims to reduce social inequality. This makes financial sense, as it leads to a release of talent that supports future economic progress. In contrast, a failure to address wider criteria can be destabilizing. This is particularly true when Ghana faces significant population growth through to 2100.

This will cause instability if not actively managed through effective rural development.  The rural banks are one of the key channels to distribute funds to businesses in their localities. They can also educate and encourage positive entrepreneurial activity. The evidence suggests that rural and community banks have a key role in the country’s economic development. They can act as a catalyst to stimulate the rural economy by supporting micro and SME businesses based in rural areas.

Unfortunately, rural SME are facing unprecedented challenges in accessing affordable finance. There is a need for rural banks to be innovative in developing new business models. They also need to recognize the current challenges and support SMEs that face disruption and have growth potential. It is also clear that business modelling needs to recognize the shift from ‘double-digit’ expectations to single figure returns. With progressive thinking, rural banks are best placed to respond to the changing reality. Not least, this is due to their proximity to their target clients. They have the potential capability to serve a wider catchment area, head up local economic development and contribute far more to the expansion of the rural economy.

JCS has identified a number of key activities that can help develop this initiative and build a more robust rural financing ‘TBL ecosystem’. The rural and community banks play a very key role which may include listing RCBs on the GAX. There is scope to encourage business advisory firms to work closely with the RCBs to help them adapt to their newly listed status. It’s also important to ensure they have transparent systems. Specialist advisors can help the RCBs raise capital for lending and increase the size of their portfolios.

Listing on GAX

The listing of rural banks on the GAX is one step, coupled with other initiatives by stakeholders, which JCS and others are championing. The aim is to bring value to both existing and new shareholders. This creates opportunities for people interested in subscribing to shares on the GAX.

JCS is a keen advocate for the creation of the ‘enabling environment’ to open up new opportunities and support the listing of RCBs on the GAX. It is hoped that the initiative will also encourage the RCBs to increase the percentage of their allocated raised capital directed towards supporting the locally defined supply chains. This involves empowering more SME’s and Positive Gender Lens investments, and also a focus on renewable energy projects.

There is scope to encourage SMEs operating in rural areas to make use of sustainable energy and efficient technology. Ms Safo argues that the policy should also support business initiatives by women in the RCB areas.

JCS has been operational as an impact investment company in Ghana and has worked and collaborated with a number of investment partners over the last 20 years. The company has gained in-depth experience relating to the operation of rural banks in Ghana. This has included investment, by way of equity in the Nwabiagya Rural Bank, and JCS has now completed a partial exit (as part of a phased process of withdrawal).

The initiatives outlined in this article also provide price transparency to shareholders, as well as to potential buyers of the shares, and listed shares may also prove to be more readily accepted as collateral, should the security holder need it.

In summary, JCS believes that RCBs can provide an additional channel to deliver essential financial services. The aim is to work with RCBs of good standing. This initiative can contribute to poverty reduction and help in bridging the gap between urban and rural areas and achieve better-balanced development. This is part of a broad policy of rural economic business building. The current reality is that many are still unable to raise the much-needed capital to move their businesses forward.

The proposal is, therefore, to work with selected rural banks and promote listing on the GAX. This builds on a solid foundation for growth. JCS is now consulting with various key stakeholders.

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